Chinese enterprises setting up overseas are navigating a minefield of legal challenges, making effective dispute resolution through arbitration more crucial than ever, according to legal experts.
The emerging frontier of international arbitration to mediate contract risk for Chinese companies – fuelled in part by Beijing’s Belt and Road Initiative – not only tests Chinese firms’ legal capacity but also requires Beijing to proactively safeguard China’s economic adventurers, they said.
International arbitration is a preferred method for resolving cross-border commercial disputes outside traditional court systems and involves parties from different jurisdictions submitting their conflicts to a neutral arbitration centre.
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Its binding decisions are globally enforceable under treaties such as the New York Convention.
The convention – which has more than 170 contracting states, including China – ensures that an arbitration award made in one signatory country can be recognised and enforced in all others.
International arbitration is essential in resolving contract disputes in international business and protecting the interests of enterprises as they enter global markets, according to Zheng Zhihua, an associate professor specialising in maritime law at Shanghai Jiao Tong University.
“Properly leveraged, arbitration can effectively safeguard one’s rights, which is critical to protecting companies’ or a country’s overseas interests,” Zheng said, adding that the method allowed parties to choose arbitrators with expertise relevant to their dispute.
Relying solely on court proceedings would not only introduce a high degree of uncertainty in countries with underdeveloped legal systems, but local protectionism could also hamper the path to a fair judgment, he added.
The flexibility, confidentiality and global enforceability of international arbitration make it an attractive option for businesses looking to avoid protracted and expensive litigation while securing outcomes that are internationally enforceable, according to Zheng.
Experts cautioned that Chinese companies face significant hurdles in international arbitration because of limited understanding, language barriers, the selection of arbitration venues and differences in legal systems – obstacles that require additional support and guidance from the Chinese government.
Fan Kun, an associate professor of law at the University of New South Wales, said arbitration clauses were commonly incorporated into contracts for Chinese enterprises engaging in cross-border transactions, but were often overlooked.
“These clauses are often not a priority for these enterprises during the negotiations as the focus tends to be on finalising the deals,” said Fan, who is also an arbitrator at the Shanghai International Economic and Trade Arbitration Commission and other arbitration institutions.
According to a 2022 report from the China International Economic and Trade Arbitration Commission, the country’s challenges include limited global competitiveness and credibility of its arbitration institutions. Photo: AFP alt=According to a 2022 report from the China International Economic and Trade Arbitration Commission, the country’s challenges include limited global competitiveness and credibility of its arbitration institutions. Photo: AFP>
“This is not unique to Chinese enterprises but reflects a broader trend: dispute resolution clauses are often referred to as ‘midnight clauses’ because they are finalised at the last minute during contract negotiations,” she said.
Fan noted that awareness of arbitration as a key dispute resolution mechanism among Chinese firms was increasing as they expand.
Chinese firms might find themselves at a disadvantage because of differences between the civil law system they are accustomed to in China and the common law systems prevalent in many Western countries, particularly regarding the handling of document requests and evidence procedures, Fan said.
“Chinese enterprises, more familiar with the less extensive discovery typical in civil law systems, may find the more exhaustive and adversarial document production processes in common law jurisdictions challenging,” she said. “This can lead to a mismatch in expectations and potential inefficiencies in arbitration proceedings.”
A 2022 report from the China International Economic and Trade Arbitration Commission highlighted the challenges Chinese companies face in choosing domestic or familiar institutions for international arbitration.
These include the limited global competitiveness and credibility of arbitration institutions, coupled with a general lack of enterprise awareness about the significance of arbitration clauses, which constrains their options, according to the report.
“Arbitration institutions in China have built a reputation over time with foreign enterprises increasingly willing to utilise Chinese arbitration services. However, compared to arbitration institutions in London, Paris or New York, Chinese institutions still face competitive disadvantages,” said Zheng from Shanghai Jiao Tong University.
For example, most shipbuilding companies in China opted for arbitration in London because the London Maritime Arbitrators Association (LMAA) and British law were more widely recognised in the industry for resolving international shipbuilding disputes, he said.
Despite these hurdles, the Chinese government is being urged to provide greater support to companies and to increase the country’s attractiveness as a location for international arbitration.
Zheng said this was a “systemic project” that went beyond merely enacting new laws. As Chinese companies expand globally, the government must step up with support to address the varied legal demands they face, he said.
The government and legal sector could streamline the dispute resolution process for Chinese companies by developing standardised arbitration clauses. These ready-to-use clauses could easily be included in contracts, simplifying the process and establishing a clear framework for resolving disputes, Zheng said.
Well-prepared model clauses for arbitration could include the applicable law of arbitration, the seat of arbitration, the number of arbitrations and the language used in proceedings, and how the fees and expenses of the arbitral tribunal are determined.
Zheng highlighted the need to mitigate the shortage of legal experts, saying: “Whether in the fields of construction engineering, investment trade or intellectual property, each area has its complexities and requires arbitration experts specialised in those particular fields.”
Experts said improving the diversity of arbitrators is another crucial element in boosting the competitiveness of China’s arbitration institutions.
“To establish a top-tier arbitration institution with international influence, it is crucial to develop an arbitration panel that also possesses international clout, especially by having arbitrators with bilingual capabilities,” said Gu Weixia, an associate professor of law at the University of Hong Kong and an academic council member of the Institute for Transnational Arbitration.
“Domestic arbitration bodies aiming to enhance their international impact undoubtedly need an internationally influential team of arbitrators, and cultivating such a team will take time.”
Zheng concurred, saying there was a critical need for domestic arbitration bodies to attract top international experts across various fields, which would render their arbitration pools more diverse and inclusive, enhancing both the attractiveness and reputation of the institution.
He stressed the role of global collaboration in advancing China’s arbitration capabilities, particularly through partnerships with organisations such as the LMAA – and even inviting them to engage in Chinese arbitration cases.
“These partnerships could elevate the expertise of Chinese counterparts while simultaneously broadening the international reach of all institutions involved,” Zheng added.
In the realm of international arbitration, Hong Kong was increasingly proving to be an indispensable bridge between Chinese legal practices and global standards, leveraging its unique position under the “one country, two systems” principle, Gu said.
Hong Kong’s legal system presented multiple strengths in international arbitration, such as the robustness of its common law, a deep-seated legal culture, abundant bilingual legal talent and the judicial reasoning embedded in its case law system, according to Gu.
“The city – the only place in China practising common law – brings a wealth of case law and a distinctive legal thinking that provides significant learning opportunities for arbitration institutions in mainland China,” she said.
Gu said more mainland Chinese companies were turning to Hong Kong as a seat of arbitration, with a growing trend of conducting proceedings in Chinese and applying Chinese law, which was not traditionally favoured in international arbitration.
“These developments highlight Hong Kong’s rising significance as a powerhouse for international arbitration in China,” she added.
“Situated at the crossroads of China’s Belt and Road Initiative and the Greater Bay Area strategy, with abundant bilingual talent, Hong Kong serves not only as a superconnector in international arbitration for Chinese firms when they go overseas, but also as a strategic hub for evolving China’s legal landscape.”
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.
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