China: Enforcement of Mediation Settlement Agreements in China

Last Updated: 7 November 2002

Article by Ashley M. Howlett and Ruby S.K. Chan

One of the most sensitive issues for foreign companies operating in China at the moment concerns dispute resolution. Several western commentators have recently highlighted the vagaries involved in resolving disputes in China. Questions have been asked about the standard of judges in China and their impartiality. This was debated at length during last year's National People’s Conference in Beijing, and Supreme Court President Xiao Yang said in his report to the NPC that legal qualifications would be part of retraining programmes over the next five years to tie in with WTO requirements.

In line with the reform of China’s legal system, various forms of mediation and alternative dispute resolution are gaining in popularity and credibility in China. In fact, mediation has been a popular method of resolving disputes in China for centuries. Most mediation in China is conducted by People’s Mediation Commissions, which are mediation bodies organized by ordinary citizens for settling disputes.

People’s Mediation Commissions

According to the Regulations on the Organization of the People's Mediation Commissions, the mediation bodies, established by the villagers' committees in rural China and in neighborhood committees in urban areas, operate under the guidance of local government and people's courts. As the People’s Mediation Commissions have no judicial or executive power, they are not empowered to exercise administrative or judicial functions in dealing with disputes. Accordingly, mediation by People’s Mediation Commissions must be made at the request of all the parties involved. If the mediation fails to work, the parties involved may bring the dispute directly to court.

The tasks of the People's Mediation Commissions include settling minor civil disputes and handling minor criminal cases. After a dispute is settled through the work of a People's Mediation Commission, the parties usually sign a settlement agreement. The Supreme People’s Court has recently considered the enforceability of such settlement agreements.

The Supreme People’s Court – Enforceability of Settlement Agreements

On September 16, 2002 the Supreme People’s Court issued provisions dealing with actions relating to settlement agreements concluded through mediation ("the Provisions"). The Provisions will take effect on November 1, 2002.

The Provisions focus on the recognition and enforcement of settlement agreements concluded through meditation by People’s Mediation Commissions ("Settlement Agreements") and set out the procedures for applying to confirm and enforce or revoke such settlement agreements.

The Provisions deal with the jurisdiction of the People’s Court and the recognition, enforcement, execution, variation and revocation of Settlement Agreements.

Jurisdiction of the People’s Court

Article 2 of the Provisions confers jurisdiction on the People’s Court in respect of cases concerning the enforcement, variation or revocation of Settlement Agreements.

Recognition of Settlement Agreements

Article 1 confirms that a Settlement Agreement signed or chopped by both parties is contractual by nature and cannot be varied or discharged arbitrarily and/or unilaterally.

Article 4 sets out the various requirements for a Settlement Agreement to be valid. These include the following requirements:

  • That the parties have full legal capacity
  • That the Settlement Agreement reflects the genuine intention of the parties and is not in contravention of the law, mandatory provisions of executive enactments or against the public interest.

There are a number of grounds on which a Settlement Agreement can be said to be invalid. These are set out in Article 5 and include:

  • Where a Settlement Agreement impairs the interests of the nation, collectives or third parties
  • Where it is for illegal purposes
  • Where it impairs public interests
  • Where it is in contravention of the law and the mandatory provisions of executive enactments.

In some cases, a Settlement Agreement may be only partially invalidated. This means that other parts of the Agreement remain valid (Article 8).

Enforcement of Settlement Agreements

The People’s Court requires a party seeking enforcement of a Settlement Agreement to prove the validity of the Settlement Agreement against objections raised by the party resisting enforcement. If a party uses the Settlement Agreement as a defence in civil actions, it has to produce the Settlement Agreement (Article 3).

Execution of Settlement Agreements

A party can execute Settlement Agreements involving monetary obligations at the People’s Court where the paying party resides or where his properties are situated (Article 10).

Variation or Revocation of Settlement Agreements

A party applying for variation or revocation of a Settlement Agreement has the burden of proof (Article 3). If a party only applies for a variation, the People’s Court cannot revoke the Settlement Agreement (Article 6).

The grounds for applying for variation or revocation of Settlement Agreements include:

  • where the Settlement Agreement is concluded based on serious misunderstanding, or
  • where it is concluded unfairly.

Further, where one party (the guilty party) exerts pressure or defrauds the other party (the innocent party) so that the innocent party executes the Settlement Agreement against its true intention, the innocent party may apply to the People’s Court for variation or revocation of the Settlement Agreement (Article 6).

The right to apply for revocation expires one year after the party entitled to apply for revocation knows or ought to have known of the existence of the right to apply (Article 7).

Limitation Period

The limitation period for bringing an action on a Settlement Agreement is two years (Article 9 adopting the limitation period pursuant to Article 135 of the General Principles of Civil Law of the PRC).

Further, it is also provided that the limitation period for bringing an action on any cause will be suspended during mediation of the disputes by the People’s Mediation Commission and will be resumed upon the revocation or invalidation of the Settlement Agreement.

Conclusion

Although the Provisions published by the Supreme People’s Court do not apply to disputes involving international companies, they do provide further evidence of the extensive reform that is taking place in China’s legal system to make it more transparent, consistent and fair. The Provisions, together with the recent changes in the legal requirements for Chinese judges’ professional standards under the 2001 amendments to China’s 1995 Law Governing Judges, show that Supreme Court President Xiao Yang is serious in his attempts to bring China’s legal system into line with its WTO commitments.

Further Information

Jones Day Commentaries are a publication of Jones, Day, Reavis & Pogue and should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general informational purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship.

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