Choice of Jurisdiction in Contract: People’s Court or Arbitration

In any normal business contract, it is essential to conclude a dispute settlement clause, which shall establish that disputes can be chosen to be conducted through litigation or arbitration. Among every kind of dispute settlement method, only arbitration and litigation are mutually exclusive. In principle, once the parties choose to settle the dispute through arbitration, they shall lose the possibility of obtaining relief through litigation. Article 124 (2) of the Civil Procedure Law, Article 215 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China, Article 5 of the Arbitration Law and other relevant provisions all make this abundantly clear, which is also deemed as general practice internationally.

The various influencing factors involved in the choice between arbitration or litigation include time and the expenses associated with litigation, as the cost of trial may be one of the most important reference points when parties are choosing between arbitration and litigation. However, in reality, it is not that simple to compare, therefore, let’s look at other factors we can refer to!

–          Public Trial vs Confidential Arbitration

Litigation is based on the principle of an open trial, especially in the context of the openness of court judgments and documents in recent years. The principle of arbitration is not to be conducted in public, which can also be said to be international customary practice. The confidential nature of arbitration is conducive to the protection of the trade and business secrets of the parties, as well as to the peaceful settlement of disputes on a smaller scale, so as to leave space for future cooperation. In addition, a large number of corporate litigation cases is bound to have a negative impact on an enterprise. Any simple search on “Qichacha” or “Tianyan Cha”, can show if an enterprise has been involved with various lawsuit cases, potentially affecting its business operations such as tender bids, bank credit etc.

–          Designated Sole Trial vs Consensual Arbitration in Panel Hearing

In the people’s court, the parties have no right to choose the judge (occasions in which a party can request the withdrawal of a judicial officer from the case is an exception). In the basic courts, due to the small number of personnel and the large number of cases, an independent trial is normally implemented. In arbitration, the parties, through negotiation, can choose the arbitration organization, arbitrators, place of arbitration, applicable substantive law and even the time of arbitration according to their own situation. With the exception of the sole arbitrator hearing, the principle of arbitration shall have three arbitrators which hold a collegial hearing, which is a generally recognized type of arbitral tribunal in the legislation and practice of arbitration in various countries. Parties may consider the experience, expertise, professional title, education background, moral quality, arbitration level and many other aspects of arbitrators to choose their own trusted arbitrators in the arbitration roster.

–          Additional Involvement of Third-parties VS Strict Exclusion of Third Parties

In the process of litigation, anyone who has an interest in the case can apply for or be added as a third party to the litigation, and the result of the case shall be directly valid for the third party. For example, construction owners and general contractors may encounter a common problem with the “actual constructor”. Within instances of litigation, the actual constructor can go beyond the relativity of the contract and claim the labor costs from any illegal subcontractor, subcontractor, contractor and construction owner along the chain. Arbitration may not assist in such a situation as the arbitration procedure strictly excludes any third party out of the agreement. If a party does not conclude the contract in dispute, such party may refuse to participate in the arbitration proceedings.

–          Two-Tier Trial VS Final and Binding Arbitral Award

The system of a final and binding arbitral award shall apply to arbitration proceedings, therefore there are few remedies available, such as judicial review, cancellation or non-enforcement. In order to ensure the effectiveness of an arbitration award, the Supreme Court issued a document in 2017, which stipulates that the proposed ruling of any intermediate people’s court or any specialized people’s court upon determining the invalidity of the arbitration agreement, or to not enforce or overturn the arbitral award issued by an arbitration institution in mainland China, shall be reported to the High People’s Court within its jurisdiction for review; the final ruling shall be made based on the opinions given by the High People’s Court after it has reviewed the proposed ruling. If the parties concerned in a case involving the judicial review of arbitration reside in different provincial administrative regions, the final ruling shall be made based on the opinions given by the Supreme People’s Court.

Thus, the probability of the revocation of an arbitration is far lower than that of the second instance of litigation or the modification of a judgement. This is the reason why if arbitration is appealed for the resending of the arbitration award, there are not as many remedies available as litigation, as litigation can be remedied through appeal, retrial, objection, petition among other channels, although there is still a long way to go in the process.

Parties may pay attention to a variety of different factors in regards to the means of resolving disputes. Therefore, it is suggested that parties should choose based on what best suits the dispute according to the definition and judgement of their disputes. We at D’Andrea and Partners have a team of specialists who can advise you on the choice of Jurisdiction in Contract. If you have any queries, do get in touch with our team at info@dandreapartners.com.