It’s vital that Aussie lawyers negotiating China-related commercial contracts be aware of the workings of Mainland Chinese law and its effects on dispute resolution to avoid ending up in a Chinese court, one expert has warned.
A new edition of the Herbert Smith Freehills ‘The Dragon Book’ launched last week, sets an understanding framework for in-house teams and lawyers advising companies doing business with Chinese companies.
“As we’re seeing increased flow of investment across the Australia/China corridor, it’s important for Australian lawyers to understand how the Chinese legal system works with respect to arbitration,” Australian international arbitration head Brenda Horrigan told Lawyers Weekly.
“There are some specific requirements in China that can trip you up if you’re not aware.”
Ms Horrigan said the ‘trip’, can often occur when contracts don’t have a solid arbitration clause, where dispute resolution defaults to a Chinese court. Companies with a Chinese subsidiary to contract with Chinese counter parties are vulnerable, as all contracts in this case fall under Chinese domestic law.
“If you get that wrong, then your arbitration clause is invalid and you find yourself in the Chinese court which is not what you want to have happen,” she said.
Australian companies dealing with Chinese investors here are often under pressure to agree to an arbitration clause providing for mainland China arbitration, Ms Horrigan said.
“The guide just sets out some of the descriptions of the pros and cons of having arbitration on the mainland versus having arbitration on a neutral seat such as Hong Kong or Singapore and what the various options are,” she said.
China business has grown enormously since the report’s first edition, but so has the number of disputes. The latest report looks at CIETAC’s breakaway sub-commissions and how the Supreme People’s Court clarifies clauses in contracts prior to the breakaway.
Ms Horrigan said the biggest challenge for lawyers advising clients in the space is ensuring dispute resolution is considered from the outset.
“One of the things that this guide does is provide assistance in deciding what clause to use and how to approach the contract drafting from the outset,” she said.
“An Australian court decision will not be enforceable in China.
“If you default to your standard Australian commercial contract that provides for the resolution of disputes in the Australian courts … if you do get into a dispute, you’re not going to have much leverage against [your Chinese counterparty], because they don’t care, that decision isn’t enforceable in China, where their assets are.
“Australian companies really need to be thinking about this from the outset, and including arbitration clauses.”