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China Contracts. Arbitration Versus Litigation. It’s Complicated.

Posted in Legal News

A few months ago, co-blogger Steve Dickinson, Greg Buhyoff (our lead Vietnam lawyer), and I went on an extended  legal/business trip to Ho Chi Minh City and Hanoi, during which we met with around a dozen Vietnamese lawyers. One of the questions we asked nearly all of these lawyers (mostly because we kept getting different answers) was “what should we be putting in our contracts with Vietnamese companies, by way of a venue provision?” In other words, which of the below options would be best for our mostly American (with a smattering of European and Australian) clients:

  1. Litigation in the courts of the home country of our client.
  2. Litigation in the courts of Vietnam.
  3. Arbitration in Vietnam.
  4. Arbitration outside Vietnam.
In typical lawyer fashion, we decided that it depends.
Which is why we are writing this post as the facts and our analysis and our conclusion hold equally true for China.
Each of the above options has its pluses and its minuses and picking the right venue truly does depend on the specific situation, both for Vietnam and for China.
We will go through each of the options, highlighting each of their major plusses and minuses.
  • Litigation in the home country (within America or Europe or Australia) has the big plus of providing to the home company its greatest chance of prevailing. Litigation in America, Europe and Australia also tends not to require a large upfront filing fee/arbitration fee. But the downsides almost always outweigh the plusses, with the biggest downside being that neither Vietnam nor China will enforce the court judgments of most foreign countries. So if you are suing a Chinese or a Vietnamese company overseas and you prevail, you likely will have no means for collecting on your judgment/enforcing your judgment in either China or Vietnam. If the Chinese or Vietnamese company has assets in a country that will enforce such a judgment, then it is a different story, but that is rare. We only rarely write contracts with Chinese or Vietnamese companies that call for litigation outside of China or Vietnam, respectively. It also bears mentioning that litigation is public and has the potential to be the most expensive option of all.
  • Litigation in the courts of Vietnam or China. The biggest plus for litigating in a China or a Vietnam court is that the courts in both countries are best equipped to enforce a judgment, be the judgment a monetary one or one requiring the Vietnamese or Chinese company to do something, such as stop violating intellectual property rights. The biggest downside of the courts of both Vietnam and China is that they tend not to be well equipped for handling complex commercial matters and they are sometimes biased against foreign companies.  These negatives are much greater in Vietnam than in China and for that reason our China contracts far more often call for litigation in China than our Vietnam contracts call for litigation in Vietnam.
  • Arbitration in Vietnam or China. The biggest plusses for arbitrating in Vietnam and China are that it is quite possible to have good arbitrators, have an arbitration in English, and have good chances of enforcement. The minuses are that it is also quite possible not to have good arbitrators and to have an arbitration in Chinese or Vietnamese. The costs can also be high and enforcement (particularly of a non-monetary award) can be slow. The other day a China lawyer proudly told me that he never lets his clients agree to arbitration within China. The reality though is that Chinese companies (especially SOEs) are increasingly mandating in-country arbitration (this is also true of Vietnam). If you are going to do an arbitration in either China or Vietnam, it is absolutely essential that your arbitration provision be written so as to avoid the numerous pitfalls possible with this.
  • Arbitration outside Vietnam and China. The biggest plus with this is that you can choose wherever you want (Hong Kong, Singapore, Geneva, New York, Toronto, Sydney, Stockholm, wherever) and you can fairly easily get great arbitrators. The biggest minus (truer of Vietnam than of China, but true of both) is that enforcement of a foreign arbitration award can be slow and, even worse, can also be spotty. Be very careful here in that both Vietnam and China prohibit foreign arbitrations of certain disputes.
My law firm has written contracts providing for all of the above, depending on the confluence of the facts. There are no hard and fast rules covering every situation when dealing with either China or Vietnam.

It is common to read articles with statements like this: “Contrary to popular belief that enforcement of arbitration awards in China is very difficult, statistics show that less than 10% of arbitration awards are set aside by Chinese courts”.

This is very misleading. Talk to those who actually work on arbitration enforcement and the picture is reversed: most awards are settled rather than enforced, and although courts hardly ever set aside awards, they do nothing at all – which of course favors the Chinese party.

It really does just depend….

 For more on litigation versus arbitration, check out the following:

Not easy issues.  What do you think?

  • damjand

    Anecdotally, almost any commentary focusing on the inability to regularly and predictably enforce a right through litigation in China is misplaced when counseling a business client, because of complex differences in institutional norms and ideological priorities that have been addressed in countless treatises too numerous to list here (and the China Law Blog covers this issue regularly).

    The better question to answer for a client is whether arbitration presents an acceptable level of predictability – i.e. can a business client reasonably depend on arbitration to serve a dispute resolution purpose. The answer is yes.

    Just because courts may be weak and so there is not as strong a court culture in China as there may be in the West, doesn’t mean that the Chinese party makes decisions based on what they lack. They make decisions based on mechanisms for dispute resolution, dispute avoidance, and contractual negotiation available to them. Arbitration is one of those mechanisms and as one of the options that’s available it tends to be treated seriously.