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LEGAL ASSISTANCE: Forum Election Clauses
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altIntroduction

Companies pay a lot of attention to the material terms usually found in the beginning of the contracts (such as price, payment terms, conditions, warranties, etc.) when entering into an international commercial transaction, but often overlook the clauses usually located at the end of the agreement, which could eventually become more important and play a more significant role in the event of a dispute between the parties. One such frequently overlooked clause is the jurisdiction or forum selection clause, also referred as the ‘forum clause’.
 
The forum clauses provide the place where the parties want all disputes arising under their agreement to be solved, whether by a judicial court of a specific country or an arbitration tribunal, which can be national or international. In international transactions it is essential to include a forum clause adapted to the specific transaction and its characteristics, since if no effective jurisdiction clause is agreed upon, the forum will be determined by reference to rules of private international law which could lead to significant uncertainty as to the venue and subsequent enforceability of the resolution.
 
There is not a best solution for all cases. However, it is very important that jurisdiction and arbitration clauses are unambiguous. If it provides for litigation in courts of justice, the jurisdiction clause should specify which court and which law is applicable. If the clause provides for Arbitration, it should state where the procedure will take place, how many arbitrators will there be, how will they be elected, which will be the procedural rules and which will be the applicable law to the dispute.
 
In general, litigation and arbitration procedures have their advantages and inconveniences, but when it comes to transactions in China, some additional factors and characteristics are to be taken into account.
 
Restrictions to choice of the forum 
 
Pursuant to article 242 of China’s Civil Procedure and 128 Contract Law, only parties to a “foreign-related contract” may choose a foreign dispute resolution forum. Under Chinese Law, a dispute is foreign related if it has at least one of the following characteristics:
a. one or both parties are foreign or stateless, or if a party is a company, if it is located in a foreign country;
b. the legal facts that are established alter or terminate the civil legal relationship occurring in a foreign country or;
c. the subject matter of the dispute is located in a foreign country.
 
In must be noted that, for the purposes of this restriction, wholly foreign owned entities (WFOEs) and joint ventures are considered to be Chinese entities established under Chinese Law, and therefore, in most commercial transactions between such type of entities and Chinese counterparties, disputes may not be submitted to foreign judicial or arbitration courts because they are not foreign-related.
 
Arbitration

Due to some of the shortcomings of litigating in China or abroad, Arbitration has gradually developed into the preferable choice of formal dispute resolution between foreign and Chinese parties doing business in China. Arbitration is convenient because it allows companies to take the dispute to a more neutral forum and arbitral awards issued by international arbitration tribunals are recognised and may be enforceable across borders. Arbitration procedures are also usually resolved faster and evidence and procedural rules are more flexible.
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In China, there are more advantages to using arbitration than submitting disputes to litigation. One of the main advantages is the finality of the arbitration award. Since court decisions are subject to appeal, litigation may last for a long period of time (sometimes even years). Another issue is that Chinese judges are often not well qualified or lack appropriate experience, mainly due to the fact that the appointment of professional judges is a recent development. Therefore, since arbitration involves arbitrators who are experts and highly qualified in their fields, the quality of the award will usually be higher than that of an ordinary judicial decision. Arbitration is a more confidential and flexible procedure and, in particular, is susceptible to be influenced by local governments or the Chinese party within the dispute.
 
A dispute can only be submitted to arbitration when the underlying contract or a separate agreement expressly provides that disputes will be settled through arbitration. Under Chinese law, a valid arbitration agreement or clause must display a clear intention that arbitration be used and specify the exact arbitration body agreed by the parties. In the absence of a specific arbitration clause, the dispute will be settled by the Chinese courts or other competent courts. 
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Arbitration in China

There are three major arbitration bodies in China: the China International Economic and Trade Arbitration Commission (CIETAC), the China Maritime Arbitration Commission (CMAC), which specialises in maritime disputes, and local arbitration commissions.
 
The CIETAC is the most well-recognised Chinese arbitration body. Although Chinese arbitration bodies in China were founded and developed by the Chinese government, the CIETAC has now evolved into an independent body with a strong reputation among foreign investors. Furthermore, Chinese companies accept the CIETAC far more easily than foreign arbitration bodies. 
 
Since the CIETAC changed its rules in 2005, it has moved much closer to international arbitration practice, providing more flexibility to foreign investors. According to the current CIETAC rules, the specifications or requirements of the arbitration panel can be agreed on and determined by the parties in advance and qualified individuals of any nationality (rather than exclusively those on the CIETAC’s list) can be appointed as arbitrators. The arbitration can be held in English at a place agreed by the parties and it is also possible for the winning party to recover 100% of the costs. 
 
Notwithstanding the above, it is still essential for foreign investors to engage an experienced counsel to assist them from the very beginning of any arbitration proceeding in order to properly assess the arbitrators’ qualifications and prepare the documents to be submitted to the arbitration tribunal, etc.

 International Arbitration

Alternatives to Chinese arbitration bodies include the International Chamber of Commerce (ICC), the Hong Kong International Arbitration Centre and the Singapore International Arbitration Centre. However, it is not usually easy to secure a Chinese party’s agreement to have the arbitration conducted by an international body.
 
Although it is likely to be easier to enforce an arbitration award from the CIETAC than one from an international arbitration body, China became a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, which means that foreign arbitral awards are, in principle, enforceable in China (this convention only allows refusal of enforcement for a limited number of procedural reasons). However, enforcement of the foreign arbitral awards have proven to be quite complicated for a number of reasons, including a lack of sufficient legal training, local protectionism and delay in processing enforcement.
 
Arbitration outside China has advantages and disadvantages. International arbitration institutions are more independent and provide more neutrality, there is a higher level of professionalism of arbitrators, and there is more freedom when electing arbitrators and during the arbitration procedure. However, on the downside, International Arbitration will usually be more expensive, depending on the complexity and characteristics of the case, and enforcement of foreign awards and interim measures are usually more complicated.  
 
Litigation

Even though arbitration has become the most frequent option for dispute resolution in international agreements, litigation may also prove effective to defend foreign parties and in many cases to defend both foreign and Chinese interests in an international transaction. Parties may also choose to submit their disputes to Chinese courts or to foreign courts (except where both parties are domestic).
 
Chinese Courts

China’s court system has improved considerably in the past decades and there has been an improvement in the protection of commercial rights, both in legislation and in practice, which has resulted in a more effective and increasingly independent judiciary. Despite such efforts of the Supreme People’s Court to improving the judicial system and the success of many foreign companies when litigating in China, many foreign companies are still sceptical about litigating in Chinese courts. 
 
Generally commercial disputes involving a foreign company are usually heard by the intermediate people’s courts, which are considered to be more professional and impartial in comparison to the basic people’s courts.
 
Chinese litigation can be slow in comparison with arbitration procedures. Under Chinese Civil Procedure Law, a domestic case is generally finished within 6 months from the first instance from the date of filing and within 3 months in the second instance, before the appellate court. However, in foreign-related cases, whereby a party is foreign, there is no such time limit and it usually takes much longer to reach a ruling.
 
altEven though the Chinese judiciary is relatively inexperienced in complex commercial or technical disputes, many times submitting disputes to Chinese courts is advisable in transactions where IP rights and trade secret protection is important, since injunction and interim measures may be executed faster and be more effective in the Chinese judicial system than those available in arbitration procedures. 
 
To achieve successful results in Chinese litigation, careful preparation, good communication with legal counsel and proper contact with local officials may all help to achieve the desired outcome. 
 
Foreign Courts

Initially, submitting potential commercial disputes to a foreign jurisdiction may seem the most natural and convenient option for foreign companies because they can defend their interest in their country, according to their laws and by a judge of their nationality, but in practice, most of the time, seeking recognition and enforcement of foreign judgments and compensation in China can become a long and complicated journey. 
 
China’s Civil Procedure Law describes the procedure by which foreign companies may petition Chinese Courts to recognise and enforce judgments issued by foreign judicial courts. Chinese courts have wide discretion in evaluating whether to enforce a foreign judgment and may recognise judgments if there is a bilateral international treaty for such purposes or if the principle of reciprocity is satisfied, which in practice is very difficult.
 
When drafting a dispute resolution clause it is important to make sure that if successful the judgment issued by the court will be recognised and enforceable where the defendant or breaching party has any assets. Thus, submitting commercial disputes to Foreign courts should be considered when the other party, disregarding whether it is Chinese or foreign, has assets abroad. 
 
Conclusion

When entering into an international or domestic agreement, in China it is very important to pay close attention to the jurisdiction clause so that it suits best the transaction and your interest. It is essential to make sure it is unambiguous and enforceable in China. Often it is advisable that the parties’ contract includes an arbitration clause rather than a pure litigation clause or silence as to dispute resolution to improve the prospects of success in enforcing the rights for the foreign investor. However, litigation cannot be automatically discarded because in many cases, depending on the circumstances, it can be the best venue to solve a dispute and the Chinese judicial system is improving and is rapidly becoming more effective. 

 By Manuel Torres 
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