Dispute Resolution in China: Negotiation, Mediation, Arbitration, Court Action
Here is an edited discussion (to protect identity of parties) regarding a question about dispute resolution in Guangdong Province involving electronics sourced by a US company, but the answer is applicable at a national level for a wide range of products, so I decided to blog about the Q&A.
Thank you for your help preparing the demand letter. If that doesn’t resolve the situation, I understand we may need to go to arbitration as “Guangdong Arbitration Board” is mutually agreed in the contract. How is arbitration and mediation different from court action in China?
Dispute Resolution in China
The terms “Negotiation”, “Mediation”, “Arbitration” and “Court Action” can be confusing in terms of how they are applied in a typical dispute resolution in China. Let’s look at them one by one, in simple terms, with a focus on how they are actually used in China:
Dispute Resolution: Negotiation
“Negotiation” is the process of two companies trying to come to mutually acceptable terms on their own, rather than have a decision made by a court. Lawyers often represent the parties and help negotiate an acceptable outcome.
Dispute Resolution: Mediation
“Mediation” is when a 3rd party helps resolve the dispute. The mediator could be any mutually agreed 3rd party (such as an independent company or individual) but in the vast majority of situations, the mediator is a professional, agreed upon by both parties, in theory because the mediator is unbiased towards either party. Lawyers often represent the parties during mediation.
Mediators do not make decisions or rulings. Rather, they help the parties create their own voluntary agreement in a private setting. The agreement, when signed by each party, is legally binding. If a settlement cannot be reached in mediation, the parties reserve their rights to go to arbitration and/or court.
In practice, in China, as part of the process of litigation in the Chinese court, the judge may act as a mediator to encourage the parties to reach an agreement. That agreement will be binding. If any side breaches the agreement, the other party can apply to the court to enforce the agreement. If no mediated agreement is reached, the court will make a judgement. In a China court, the line between mediation and judgement is more fluid than in the West.
Dispute Resolution: Arbitration
In formal terms, “arbitration” is a private judicial hearing which may or may not be binding, depending on the wording of the arbitration clause in the original contract.
If there is binding arbitration clause, the case can be filed in the arbitration committee as agreed, and the ruling by the arbitration committee will be binding and final.
If a contract was not used or doesn’t include a “binding arbitration” clause, then the two sides are not legally bound to engage an arbitrator. And if there is no arbitration clause, a Chinese arbitration committee is very unlikely to accept the case.
If the contract calls for arbitration, but not binding arbitration, the dispute will most likely need to go to non-binding arbitration first as is unlikely to be accepted by a public court in China until arbitration has been pursed. If you are not happy with the results of non-binding arbitration, the Chinese lawyer representing you can open a formal court case in China. “Formal court case” refers to legal action taken in the “public court” or “real court” or “serious court” in layman’s terms.
Dispute Resolution: “Chinese Mediation” feels more like “Negotiation”
Because the arbitration courts are overwhelmed (especially in this post-Covid era), they will often assign a “mediation” period before formal arbitration takes place in the arbitration court, in hopes the case gets resolved and never lands on their desk for formal arbitration.
Technically, “mediation” means a “guided negotiation by a 3rd party”. But in actual practice, the arbitration courts in China use the term “mediation” to mean they hope the lawyers representing the two sides will find a compromise that is mutually acceptable to both parties. In other words, this type of “arbitration court ordered mediation” is really just a last attempt at negotiation led by the lawyers. Because neither party fully trusts the other party’s lawyer (rightfully so!), it isn’t classic “mediation” where an independent 3rd party is assigned.
In the US for example, if 2 parties engaged in “mediation” there would be a neutral 3rd party. In the Chinese situation above, “mediation” is really just another round of negotiation in hopes of avoiding arbitration. And arbitration is done in hopes of avoiding “actual court”.
Dispute Resolution: 2 meanings for “Going to Court”
To further confuse things, because “arbitration court” is a type of court (private court), technically, “going to court” could mean either going to arbitration as well as going to public court (so called “real court”). If the two parties agreed that arbitration will be binding, then essentially going to arbitration is the same as “going to real court” for lack of a better phrase!
ABL Blog: Sr. Editor and Primary Content Creator: Michael J. Bellamy
Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses. Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.
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