[Q&A] Litigation or Arbitration? How to Resolve Commercial Contract Disputes? (Part 1)
2024. 4. 11
[Q&A] Litigation or Arbitration? How to Resolve Commercial Contract Disputes? (Part 1)
As a corporate law firm, we are used to answering many questions from our clients about their business in China. In this series of Q&A articles, we will discuss some of the topics that our clients have shown interest in.
Question: Litigation or Arbitration? How to resolve commercial contract disputes?
Answer: Commercial disputes encompass civil cases that necessitate the adjustment of commercial legal relationships. The choice between litigation and arbitration, two common dispute resolution methods, can significantly influence the final outcome of a case. In the realm of commercial contracts, the choice between arbitration and litigation hinges on the rules, pros, and cons of both methods. Drawing from our experience, we will analyze the circumstances where arbitration or litigation is more suitable. This article, the first in a series, will primarily discuss scenarios where arbitration is the recommended approach for resolving commercial contract disputes.
Arbitration is often the preferred choice in the following situations:
1.Contracts or transactions involving confidential information: Despite the controversy surrounding the decision of the “China Judgements Online” (an official website publishes the judgement documents issued by the Court) to stop publicizing court documents since 2023, the platform currently continues to function normally. The Supreme People’s Court has also affirmed that the platform will continue to serve its purpose. Hence, court documents will remain publicly accessible for some time. In contrast, arbitration adheres to the principle of non-public trials, ensuring that the arbitration award is not publicly announced, regardless of the arbitration procedure’s outcome. This confidentiality can be crucial for protecting corporate reputation and facilitating future financing. In practice, this situation typically arises in disputes involving contracts with technical secrets or business operation information, or when the disputing parties wish to avoid public trials and public disclosure of court documents due to considerations of corporate and personal reputation, image, or business strategy.
2.Contracts or transactions involving specific professional fields: Some contracts involve transactions with complex professional characteristics. Understanding these transactions and applying the law often requires a deep understanding of professional content. Therefore, parties can agree in advance that any arising disputes will be governed by arbitration, conducted by an arbitrator with significant experience and a professional background in the specific field. This ensures the quality and effectiveness of dispute resolution. In contrast, if applying litigation as a means of dispute resolution, it is undeniable that objectively, for contracts and transactions involving a specific field of specialization, the actual jurisdiction of the court may not be able to possess sufficient experience in the field, resulting in the decision being based on the previous conclusion of a certain degree of universality of the trial experience. Even if the introduction of expert opinion in the litigation can be used to provide the court with professional advice, this method cannot always achieve the desired results in practice. Even with an expert opinion, there is a risk that the court will ultimately consider it "not to be a basis for the verification of objective facts", thus rendering it "not to be part of the legal evidence".
3.Contracts or transactions that may require overseas execution: Chinese courts’ civil and commercial judgments currently lack an international convention for widespread enforcement in other countries. However, arbitration, under the “Convention on the Recognition and Enforcement of Foreign Arbitral Awards” of 1958, which covers 169 member countries, provides global enforceability for arbitration awards. This means that arbitration awards that meet basic conditions can be recognized and enforced by the judicial system of other member countries of the convention. Therefore, if the contract or transaction involved in the dispute may require overseas enforcement in the future, agreeing to a specific arbitration institution as a dispute resolution method in the contract can achieve a more efficient enforcement effect than the court’s civil and commercial judgments, maximizing the claimant’s rights.
In conclusion, we recommend prioritizing arbitration as a dispute resolution method for future contracts or transactions involving overseas enforcement, those involving business secrets or core technologies that should not be made public, and contracts or transactions necessitating strong industry expertise. We will analyze the types of contracts or transactions that are more suitable for litigation in the next part of this series.
