The right resolution mechanism for cross-border disputes

Against a macro backdrop of global changes, an increasing number of Chinese businesses are seen “going global” and participating in cross-border commercial activities. However, disputes may arise, as opportunities and risks always go hand in hand. Once a dispute arises, the first thing to consider is which mechanism to choose. To avoid any passive choice after a dispute arises, parties should take seriously the inclusion of a dispute resolution clause when drafting a commercial agreement.

Arbitration agreement

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the New York Convention, has been acceded to by more than 172 countries and covers most economies in the world, thereby enabling international arbitral awards to be widely enforced among contracting states. Arbitration has significant advantages over litigation. International arbitration procedures also provide greater flexibility, respect party autonomy and maintain a higher level of confidentiality, effectively protecting trade secrets and sensitive information.

Choosing arbitration to resolve a dispute requires the contracting parties’ clear consensus on an arbitration agreement. When drafting such an agreement, the following key points should be addressed.

Validity. The validity of an arbitration agreement is a prerequisite when seeking a dispute resolution through arbitration. As the New York Convention does not define substantive validity standards of an arbitration agreement, the validity must be determined under the governing law of such an agreement. Therefore, the arbitration agreement should specify the governing law to minimise potential disputes.

Arbitration institution. A designated arbitration institution distinguishes ad hoc arbitration from institutional arbitration and may even affect the validity of the arbitration agreement, as some jurisdictions do not recognise ad hoc arbitration. When selecting an arbitration institution, multiple options are available. For a Chinese business, domestic arbitration institutions should be prioritised, while institutions in Hong Kong, Singapore and other Asian regions are also viable. Traditional international institutions, such as the International Court of Arbitration of the International Chamber of Commerce and the London Court of International Arbitration, can also be considered. Key factors such as convenience, cost, credibility and enforceability of awards should be carefully balanced.

Arbitral seat. The arbitral seat determines the “nationality” of an arbitration award, which in turn affects its recognition and enforcement in other jurisdictions. The Supreme People’s Court of China stipulates that awards rendered by foreign arbitration institutions with mainland China as the seat shall be deemed foreign-related awards of mainland China, directly enforceable as domestic awards without undergoing recognition procedures. Designating a party’s home jurisdiction as the arbitral seat helps streamline enforcement formalities. The arbitral seat and the arbitration institution’s location may be geographically distinct – parties may select a third-country institution while designating another jurisdiction as the seat.

Arbitrator. Arbitrator appointment procedures vary across institutions and arbitration rules but universally prioritise the principle of party autonomy. Most arbitration frameworks allow parties to prescribe arbitrator qualifications in their arbitration agreement, such as minimum years of experience, technical expertise, language proficiency and sector-specific credentials. For a dispute requiring highly specialised expertise, clearly defining arbitrator competencies in advance is strongly advised to ensure a fair and effective resolution.

Other considerations. Additional provisions may cover procedural language, applicable arbitration procedures, such as the expedited procedures offered by some institutions, tribunal composition and timelines for rendering awards.

When drafting an arbitration agreement, parties must consider the validity standards in both the arbitral seat’s jurisdiction and the potential enforcement jurisdiction to avoid future complications.

Cross-border litigation jurisdiction clauses

While arbitration offers several advantages, it also has limitations, such as high costs in international arbitration, lack of support in certain jurisdictions and difficulties in cross-border preservation and interim relief. In contrast, litigation may be preferable in those scenarios.

For litigation, selecting the appropriate jurisdictional court – from the parties’ home courts – is critical. For a Chinese business, a domestic court offers a home advantage. However, as a potential plaintiff, it must also consider the recognition and enforceability of awards in a foreign jurisdiction. This involves examining whether China has signed bilateral treaties with the relevant jurisdiction for mutual recognition and enforcement of court awards, and whether local conditions allow for such enforcement. If enforcement is uncertain, opting for the other party’s home court as the jurisdictional court may be a more practical choice.

However, since the Chinese business cannot predict whether it would be the plaintiff or defendant, choosing a single jurisdiction may not help maximise the advantages of litigation. Where negotiation permits, parties may adopt asymmetric jurisdiction clauses, that is, allowing the Chinese business to sue in China or the counterparty’s jurisdiction while restricting the counterparty to sue only in China. Such clauses are already recognised by Chinese courts, yet it is still necessary to consider their validation and recognition under the counterparty’s jurisdiction when drafting.

Commercial mediation

The high cost of cross-border dispute resolution has elevated commercial mediation as a key alternative mechanism. To address the cross-border enforcement challenges of international settlement agreements resulting from mediation, the United Nations Convention on International Settlement Agreements Resulting from Mediation, or the Singapore Convention, was adopted in December 2018 and took effect on September 12, 2020. Once ratified by China, it will provide enforceability guarantees across contracting states. Until ratification, mediated outcomes may still be formalised through arbitral settlement awards.

In conclusion, careful attention must be given to drafting dispute resolution clauses when engaging in cross-border commercial activities. Arbitration remains the preferred method for resolving cross-border disputes, litigation retains utility in jurisdiction-specific scenarios, and mediation offers a viable alternative. The choice of dispute resolution should align with the practical considerations of the transaction.

Luo Jinrong is a director and partner at King & Win Law Firm. He can be contacted by phone at +86 188 0012 5609 and by email at luojinrong@kwlaw.cn
Zheng Lucai is an associate at King & Win Law Firm. He can be contacted by phone at +86 157 1197 8424 and by email at zhenglucai@kwlaw.cn