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.

dispute resolution in china

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.

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 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.  If the contract does not specify that arbitration will be binding, then there is wiggle room to get out from under an unacceptable “ruling” of the arbitrator.  

 

In that situation, the client who is not happy with the results of the arbitration, can open a formal court case.  Formal court case refers to legal action taken in the “public court” or “real court” or “serious court” in layman’s terms. However, because failure to come to terms during arbitration means spending more time and money on a court battle, there is an incentive for both parties to resolve the dispute and accept the arbitrator’s ruling.

Dispute Resolution: “Chinese Mediation” is really “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 this instance, 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!

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ABL Blog: Sr. Editor and Primary Content Creator:  Michael J. Bellamy

About the Author: 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.

A featured presenter on China issues at seminars, trade shows and corporate events across the globe.

Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/

Mike is the author of “The Essential Reference Guide to China Sourcing
(available on Amazon).

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