Avoiding civil liability
Accidents and disputes happen. Sometimes it is possible to minimise their consequences; sometimes it is not. That is what keeps litigation lawyers busy. China is like anywhere else in that respect, except that it is still developing mechanisms and laws for resolving disputes. In general, the laws and regulations are better established now to help 'parties' to a dispute to resolve them. However, it remains the case that personal contacts - and guanxi - still play a major part in bringing disagreements to an early resolve. That is why you should always make it your business to be personally acquainted with local government officials, in particular the officials in the government agencies which are involved in the operation of your business in China. That way, when a complaint is lodged against the business, friendly officials will be in a position to assist and support the business in dealing with the complaint.

When it is perceived that a foreign investor is supported by local government authorities, frivolous lawsuits are much less likely to be initiated. Even when a company is involved in litigation, it is less likely that the government will press for a decision against the interests of the company.

Arbitration
Where you do get into a dispute in China involving your business, you should always consider referring the dispute to the China International Economic and Trade Arbitration Commission (CIETAC). Headquartered in Beijing, CIETAC has built up a substantial reputation for providing fair and efficient dispute resolution services.

The China Maritime Arbitration Commission (CMAC) is also particularly well regarded. This commission is a non-governmental institution for the resolution of contractual and non-contractual maritime matters, including domestic, foreign-related and international disputes.

In all major cities in China, there are a number of local arbitration institutions established to handle disputes among Chinese parties. Foreign parties sometimes use these arbitration forums as well. Procedures at such forums tend to be more informal and much less predictable that the two major institutions described above.

Arbitration laws and regulations
The Arbitration Law of the People's Republic of China (Arbitration Law) regulates the operation of Chinese arbitration commissions and associations, sets out procedures for an arbitration and stipulates certain matters relating to enforcement of arbitration awards. The Arbitration Law is supplemented by rules issued by the various arbitration institutions.

Enforcement of arbitration awards
China is a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). By virtue of the New York Convention, awards made by a foreign arbitration tribunal from a country that is also a signatory to the New York Convention are entitled to be enforced in China, and vice-versa. A special reciprocal enforcement arrangement is in place governing awards made in Hong Kong and mainland China which means that a Hong Kong award is enforceable in mainland China.

The PRC Civil Procedure Law provides the legal basis for enforcement of awards made by CIETAC, CMAC and other local arbitration commissions. If one party to the lawsuit fails to comply with a CIETAC or CMAC arbitral award (i.e., an award issued in a case with a foreign party or other foreign connection), the other party may apply to the local intermediate people's court in the jurisdiction where the defaulting party has property, or is 'domiciled', for enforcement of the award.

Foreign investors should note that there is a time limit of six months for the enforcement where both parties to the dispute are business entities (the period is longer where an individual is involved).

Arbitration proceedings
Arbitration procedures in China are quite different from arbitration procedures of other countries. Foreign investors are sometimes dismayed at the fast pace of the proceedings and the habit of many arbitrators to suspend the arbitration midway and commence conciliation meetings or mediation. If the conciliation or mediation fails, the arbitrator will resume the arbitration proceedings. The disadvantage with this is that information disclosed during the conciliation cannot be erased from the arbitrator's mind later on if the conciliation fails, so this fact needs to be taken into account during the conduct of the conciliation and the arbitration. These and other differences require considerable experience in dealing with CIETAC arbitrations. Nevertheless, CIETAC proceedings are considered quite fair and unbiased.

Litigation
The courts in China generally operate in a reasonably fair manner when the parties have experienced lawyers representing them. Nevertheless, there are some peculiarities to the Chinese judicial system which are worth knowing about before litigating.

Something to keep in mind is the lack of independence from governmental interests. Under the present system the judiciary's primary loyalty is to the government. The local people's government pays the salaries of judges and other judicial personnel, and when 'sensitive' cases (meaning cases considered to affect government policies, government interests of any kind, or certain persons or entities favoured by the government) are brought to court, pressure may be exerted on the judges not to embarrass the government or penalise the favoured party with an adverse judgment.

The usual rule is that the court in the location of the 'domicile' of the defendant (i.e. where the company has its operation or is based) should hear the case, but sometimes the court at the location of the incident under dispute will accept a case. While Chinese courts normally can take jurisdiction to hear a case about anything occurring in China or involving a Chinese citizen, a court does not automatically accept a case. Sometimes, local interests are protected by a reluctance to accept a case against a local party. This should be taken as a warning signal that the court might not be entirely unbiased in its determination of such a case. There is often some room for 'forum shopping'. It is often permissible to bring concerns about fairness directly to the president of the court. Experienced lawyers know how to avoid or ameliorate the effects of some sorts of local protectionism.

Cases involving foreigners
Cases involving foreigners are heard at first instance at an intermediate people's court (at the municipal or prefectural level). If the amount in dispute is significant, the higher people's court (provincial level) may hear the case instead. Court practice differs in provinces and cities within China and understanding them can sometimes be difficult.

Court decisions can be appealed once. If the appeal fails, the decision is binding and immediately enforceable against the losing party.

The plaintiff must pay into the court a fee which is calculated as a percentage of the amount at issue in the claim. Counter-claimants must also pay a similar fee. This fee is kept by the court regardless of the outcome of the case, although the judgment may state which party is ultimately liable for the court fee. Additional fees will be charged if the court hears any witnesses, expert advisors or hires translators, surveyors or any other specialists which the court feels would be helpful in the resolution of the case. It is not possible to refuse to pay such charges but the amount can (occasionally) be challenged if it is incorrectly calculated.

A case involving a foreign party is usually heard by a panel of three judges. All the arguments and evidence for use in the trial must be in Chinese. The hearing will be conducted in Chinese as well. It is unusual for judges to understand or speak English. The parties are entitled to file written arguments - which is a good opportunity to deliver your entire argument without the risk of being interrupted. (Judges sometimes refuse to hear oral arguments if they get impatient or if they think they have heard the argument before.)

Mediation
Judges and arbitrators in China routinely attempt to mediate a case, sometimes even initiating a mediation in the middle of proceedings. Judges and arbitrators have the authority to encourage the parties to mediate at any time. The mediation procedure is essentially a supervised settlement negotiation. If successful, the parties sign a mediation agreement containing the details of the settlement.

Mediation agreements are favoured because the parties are more likely to abide by an agreement which they have worked out themselves. Mediated settlements cannot be appealed and for this reason are less troublesome than a judicial judgment. The courts and arbitration tribunals through which formal mediation settlements are reached are permitted to log the case as formally resolved. A mediated settlement counts as a successful resolution which cannot be overturned.

Foreign litigants need to understand how widespread mediation is and how popular it is with judges and arbitrators. The parties must be prepared to be flexible in order to get in all of their submissions when the flow of the presentation is broken up by an attempt at mediation. Furthermore, it does not leave a good impression if a party is seen to be unco-operative during a mediation session. At the same time, an attempt to mediate a case does not mean there is no choice but to agree to the other side's demands. If the opposite party takes an inflexible position during mediation, the litigation may continue. There is no rule that a mediation, once commenced, is the only way out.

Foreigners should not be overwhelmed by the fear that courts in China always favour local parties. While local favouritism does exist, there are strong concerns that the courts must not be seen as biased by foreigners. If the matter under dispute has been fully reported to the local government, and especially if these authorities have been extensively consulted prior to litigation, it may be possible for the foreign party to get some of these officials to appear at court as a show of local government support for the foreign party. Foreign investors are not prevented from demonstrating that they too have local support.

'Ex-parte' lobbying
There has traditionally been a good deal of 'ex-parte' lobbying by counsel (the technical term for senior advocating lawyers). What this means is that judges often investigate the facts of a case on their own initiative or with whatever expert assistance they request. This is considered acceptable on the grounds that judges are responsible for investigating as well as hearing arguments in a case.

In view of the growing concern relating to the investigation power of judges and as part of the WTO commitment, the supreme court now operates by rules which attempt to set out in clear terms the burdens of proof amongst the parties, limit the judge's power of investigation and also provide a mechanism for 'discovery' of documents so that each party will have the fair opportunity to comment on the documents and evidence presented to the court by the other party. The effectiveness of these rules has yet to be seen.

Local government officials may also participate in lobbying judges. As the judge may have to take into account public policy issues i.e. employee lay-off in an insolvency case, protection of local investment environment etc, official lobbying is sometimes very persuasive.

Separate arrangements and procedures exist in criminal cases.

Written by DLAFor further information, contact christopher.clarke@dla.com, tel (852) 2103 0690