China: Legal Practice Of Dispute Resolution For Chinese Overseas Investment

Last Updated: 15 January 2018
Article by Harrison Jia
Most Read Contributor in China, August 2019

China's foreign investment has shown a steep rise in recent years and China has become one of the world's major outbound investment countries. According to the data of MOFCOM, Chinese investors have made non-financial overseas investments of USD 170.1 billion in 2016 (with a growth rate of 44.1% comparing with 2015) in 7,961 overseas enterprises in 164 countries/areas worldwide, and the turnover of overseas EPC projects was USD 159.42 billion (with a growth rate of 3.5% comparing with 2015). With the growth of outbound investments, the dispute resolution for overseas investment projects has become a major issue, which mainly involve litigation, international arbitration and mediation (ADR).

  1. Litigation

The disputes of many cross-border investment projects are resolved in their host country through local courts. Frequently, the problems that arise are the recognition and enforcement of the  judgments of foreign courts in China or vice versa. There are three elements for a court in China to recognize and enforce foreign court judgments: (1) a certain and valid foreign court judgment; (2) valid jurisdiction; (3) the public policy standard, i.e. whether the foreign court judgment contradicts with the sovereignty, security and social public interest of China. The recognition and enforcement of foreign court decisions will be subject to the existence of relevant international treaties or reciprocal relationship.

According to the statistics of the Ministry of Foreign Affairs of China, as of February 2017, China has concluded 135 agreements (108 in force) with 70 countries, including judicial assistance agreements, agreements on the return and sharing of assets, extradition treaties and the agreements on the fight against "three forces". The details are as follows: (1) 19 judicial assistance agreements on both civil and criminal matters (all in force); (2) 40 judicial assistance agreements on criminal matters only (32 in force); (3) 20 judicial assistance agreements on civil and commercial matters (17 in force); (4) 1 agreement on the return and sharing of assets(not yet in force); (5)48 extradition treaties (34 in force); and (6)7agreements on the fight against "three forces" (6 in force).

One Chinese client of DeHeng who was involved in a dispute over the investment into an Australian company was sued in an Australian court, which then triggered the issue of the recognition and enforcement of the judgment of an Australian court in China. We found that, according to the Reply of the Supreme Court of China on Application for Recognition and Enforcement of the Australian Court's Judgment by Applicant Fraser Power Engine Co., Ltd. ([2006] Minsitazi No. 45) (March 1, 2007), it is stated that there is no international treaty between China and the Commonwealth of Australia. Neither the two countries have concluded or participated in the mutual recognition and enforcement of the court's civil judgments or rulings, nor have them established any reciprocal relationship. Thus, the application for recognition and enforcement of the Australian court's judgment had no legal basis and therefore was rejected. There was another overseas lawsuit represented by DeHeng in a Singapore court, and DeHeng lawyers won the lawsuit by carefully studying the case and spotting the subject matter of the lawsuit and the statute of limitations. In the end, the court ruled that the other party bear litigation costs and the lawyer fee as well.

  1. International Arbitration

With an arbitration agreement, the parties of an international investment may also resort to the international arbitration tribunal to settle their dispute. An effective arbitration agreement usually requires three elements: (A) the application for arbitration; (B) certain arbitration matters; (C) a selected arbitration tribunal. However, Chinese enterprises did not win many international arbitrations in the past. Based on reports by China's Arbitration Law Research Institute, Chinese enterprises are now facing a very embarrassing situation that the ratio of their overseas arbitrations is about "nine failures out of ten cases", and ended with "huge compensation to the foreign party." The major reasons for these arbitration failures are as follows: (1) unfamiliar with foreign language; (2) most of the arbitrators are foreign arbitrators and they do not understand Chinese language, and may be inclined to favor the other foreign party; (3) the procedures are complicated, time-consuming and costly; (4) differences exist between China and other countries in respect of legal concepts, rules, cultural traditions and the way of thinking.

Although China has signed bilateral investment treaties (BITs) with more than 130 countries in the world, however, most of the BITs were concluded in the 1980s and 1990s. The definition of investment and the scope of arbitration matters under those BITs may need further revision. Chinese enterprises shall take all factors into consideration when making overseas investments and BITs with higher level of investor protection can be chosen through the establishment of holding companies in third countries so as to enjoy higher levels of treaty protection. In addition, China International Economic and Trade Arbitration Commission has firstly released the "International Arbitration Rules for Investment Disputes (Provisional)" in China which has come into force as of October 1, 2017 and could provide Chinese enterprises with guidance for settling investment disputes with host countries.

In one international arbitration case on overseas investment projects in UAE, DeHeng lawyers assisted Chinese companies in preparing experts' reports, hiring first-class expert witnesses to court and first-rate Queen's Counsel (QC), and examining documents weighed hundreds of kilograms. After four years of arbitration, the arbitration tribunal finally ruled in favor of the Chinese company in 2016. In addition to the arrears of payment and interests, the other party should also bear 80% of the lawyers' fees of the Chinese company.

  1. Mediation

Enterprises in China advocate the Chinese traditional principle that "harmony is most precious", which is conducive to resolving overseas investment disputes through mediation and other alternative dispute resolution methods. The settlement of international disputes through mediation has the following advantages: (1) it is easier to resolve disputes; (2) it is flexible, simple and efficient; (3) the results are flexible and diverse; (4) it can reduce confrontation and conflicts; (5) more confidential; and (6) lower cost.

On July 24, 2009, the Supreme Court of People's Republic of China issued the Opinions on Establishing and Improving a Mechanism to Solve Conflicts and Disputes Linking Litigation with Non-litigation, and pointed out the importance of giving full play to the people's courts, administrative organs, social organizations, enterprises and other institutions, and promoting the comprehensive development of all sorts of dispute resolution methods. The courts encourage and support the trade associations, social organizations, enterprises and other institutions to establish and improve the functions and mechanisms of mediation. On July 7, 2015, the Supreme Court issued the Opinions on Providing Judicial Services and Safeguards by the People's Court for the Belt and Road Initiative, which would provide support for the development of a diversified dispute resolution mechanism and the timely resolution of disputes related to the Belt and Road initiative.

On October 18, 2016, Ms. Wang Li, the director of DeHeng Law Offices, initiated the establishment of Beijing Retio Legal and Commercial Service Center for the Belt &Road Initiative and BnR International Commercial Mediation Center, aiming to meet the needs of the Belt and Road dispute resolution mechanism. Approved by Beijing Law Society, and permitted by Beijing Municipal Civil Affairs Bureau, Beijing Retio Legal and Commercial Service Center for Belt& Road Initiative was founded by Beijing DeHeng Public Welfare Foundation in association with China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters, China Industry Overseas Development Association and China Chamber of Commerce for International Economic Cooperation, and registered in accordance with the laws as a  non-governmental unit, to carry out investigation, study, cooperation and exchange, legal business consulting, training, commercial mediation, and other services regarding the Belt and Road initiative. BnR International Commercial Mediation Center was then established to undertake the mediation duties of Beijing Retio Legal and Commercial Service Center for Belt& Road Initiative and to assist the parties involved in the international commercial disputes through online and offline mediation. Under the direction of the Judicial Reform Office of the Supreme Court, BnR International Commercial Mediation Center is another new achievement for the construction of a more diversified dispute resolution mechanism in China. BnR International Commercial Mediation Center has now established overseas mediation offices jointly with many local law firms or chambers of commerce in Austria, Italy, Brazil, Spain, Peru, Kazakhstan and many other countries around the world, as well as Chengdu Shuangliu Free Trade Zone, Wuxi City and Zhuhai City within China.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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