When contractual disputes arise in China, they are resolved in accordance with principles that may be quite different from those in other countries.
In resolving a dispute, an adjudicator will scrutinize the contract in connection with the dispute. A contract-centric system prevails in China and the adjudicator will aim to bring about the realization of the contract’s intentions. The contractual relationship must be analyzed so the appropriate form of resolution can be determined.
Modes of dispute resolution
In contractual disputes where foreign parties are involved, the preferred form of dispute resolution is negotiation, which tends to cost less and preserves the possibility of a continuation of the working relationship between the parties.
If negotiations prove ineffective, the parties have recourse to mediation, litigation and arbitration.
Principles governing dispute resolution
Chinese law promotes self-government of contractual issues by the main parties to a contract. Mediation by external parties is only resorted to if the parties are unable to resolve a dispute amongst themselves.
In the event that external mediators or adjudicators are hired to resolve the dispute, the parties choose between various modes of dispute resolution such as mediation, arbitration or adjudication. Mediators who are called in may have had prior involvement in the matter, having participated previously in the creation of the contract or the execution of its objectives. As decisions made during mediation are usually not binding, there is a possibility that the parties will not follow through on what was resolved during mediation, thereby necessitating recourse to arbitration or adjudication.
The State Administration of Industry and Commerce (SAIC) can provide for mediation and arbitration and participates actively in the resolution of contractual disputes. Where called upon in arbitration, the SAIC functions as a court and hands down binding decisions.
After the failure of other avenues of dispute resolution such as negotiation and mediation and possibly upon appeal after being heard in the SAIC, the case is usually brought to court.
Laws pertaining to the contractual relationship and dispute resolution
Under Chinese law, the contract and the relationship arising as a result of the contract are paramount. The prevailing principle is that two willing parties can give rise to a contractual relationship that should be upheld. Because of this principle, mediators and adjudicators tend to try to bring about resolutions that remain faithful to the intentions of the contract.
There are also some general principles governing contracts, though these remain nebulous and of somewhat unknown origin. Industry practice, customary law and unspoken regulations have produced norms such as the idea that contracts cannot be entered into through coercion, and the requirement of communication to reach a common understanding.
Administrative regulations governing contractual relationships are various and plentiful, with some being passed down by the central government, and some by municipal governments. Some of these regulations are classified by industry, with sets of rules pertaining to transport, employment and mining. These regulations attempt to prescribe conduct involved in the making of contracts and to standardize the types of contracts and agreements that can be entered into by parties.