Originally from Dispute Resolution in China - Second Edition

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I. Introduction

Parties entering into business or commercial relationships are often reluctant to focus on the seemingly distant possibility that their relationship may, in the future, break down or that they may become embroiled in a dispute. Nevertheless, it is a fact of life that commercial relationships do break down, and may require a process of formal dispute resolution for the ultimate enforcement of legal rights. This is no different for China-related contracts involving foreign investors, notwithstanding cultural factors in China which are often said to weigh in favour of amicable or mediated resolutions of contractual disputes.  Indeed, the significant and continuing growth of China-related transactions has been accompanied by a concomitant rise in  commercial disputes between Chinese and foreign parties which  require binding methods of dispute resolution such as court litigation or, more commonly, arbitration.

In the fast-moving and vibrant commercial environment that is modern China, it is perhaps understandable that, during the contract negotiation stage, many parties are not focused on the terms of the dispute resolution clause but instead on the ‘commercial’ terms. Nevertheless, once a dispute arises, the dispute resolution provision becomes a pivotal clause in the contract. While a dispute resolution clause may not be a panacea for every conceivable ill that can arise out of a commercial relationship, a well-drafted clause can avoid many difficulties associated with a party’s ability to enforce its rights under a contract. A good dispute resolution clause seeks to avoid conflict with legal and regulatory regimes with which the parties or subject-matter of the contract may interact, seeks to anticipate the types of disputes that may occur and creates a clear structure for the resolution of any disputes that do arise. A well-drafted dispute resolution clause can also position a foreign investor on a level playing field vis-à-vis its local counterparty with respect to resolving their disputes and, in certain cases, can even provide some leverage in settlement negotiations.