Whenever a Western company loses a business dispute, it usually
accepts the ruling of the court and pays up (assuming appeal is no
longer possible). Chinese businessmen tend to hold a different
view: it ain't over until it's over.
When entering into a transaction with a Chinese counterpart,
enforcement of the agreement should already be taken into account
during negotiations. A (foreign) bank guarantee or escrow is of
course a good solution, but this is often a non-starter for the
Many foreign investors hold the view that arbitration outside
China is the best way to settle disputes. This is, however, based
on a limited understanding of how enforcement in China works in
practice. We often advise clients to opt for a Chinese language
agreement (with English translation) under Chinese law, with
dispute resolution in China.
Judgments by foreign courts usually have no value at
all in China (save for where bilateral treaties on reciprocal
recognition exist, e.g.with France or Italy, but even then the
treaties tend to have a very limited scope). China is, however, a
party to the New York Convention, so Chinese courts should
recognize foreign arbitral awards unless certain specific
exceptions apply. It is no surprise that Chinese courts have relied
on these exceptions to protect Chinese parties and refuse
recognition (e.g. because a foreign award would be
contrary to PRC public policy).
It did not take long for the Chinese government to realize this
was bad for international investment and trade, so it introduced
the rule that any court refusing recognition of a foreign award
should report to the PRC Supreme Court. Since then, only a handful
of awards have been refused. Anyone who believes this has solved
the problem, however, will be surprised by Chinese creativity:
local courts now sometimes simply refuse to register a case, or
they delay it indefinitely; if there is no ruling, then there is no
obligation to report to the Supreme Court...
For now let's however assume you managed to win the
arbitration - this was easy, since your Chinese counterparty did
not even bother to show up - and a PRC court has recognized the
foreign award. More than a year has gone by since the dispute
started and by now you are finally allowed to enforce in China.
Guess what? The Chinese party is nowhere to be found, its company
is liquidated and all assets have disappeared. While you were
winning the arbitration in some comfortable place like Singapore or
Hong Kong, your Chinese counterparty has been busy too.
Had your agreement instead given jurisdiction to a Chinese court
or arbitration institute, you would have been able to freeze assets
immediately prior to the proceedings (this does require a deposit
or guarantee from your side). In such case, assets really cannot be
transferred out.So, unless there is any relevant asset abroad,
dispute resolution in China is often the best way to put pressure
on an unwilling Chinese counterparty and to preserve its
What about the quality of legal proceedings in China? First of
China ranks 19th on the World Bank's global
contract enforcement ranking (ahead of countries like the UK,
Italy, Spain, the Netherlands and Switzerland). This ranking is
mainly about speed and costs, but in our experience courts in
Shanghai, Beijing and other large cities are rather sophisticated.
Of course you donot want to go to court somewhere in the province
where your counterparty is the largest employer and has close
family ties with the mayor. In such event a reputable Chinese
arbitration institute, possibly with foreign arbitrators, is a good
What about the language of your agreement: should the English or
Chinese version prevail? Chinese judges will simply refuse to read
any English, even those few clauses essential to the dispute.
Wouldn't it therefore be better to rely on a Chinese version
drafted by your lawyer, instead of arguing forever over a
translation made by a third party?
We discuss Robinson Helicopter Company Incorporated v McDermott  HCA 22 .
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