Dispute Resolution Final Report

1
Sino-Australian Business Disputes:
Best Practice Dispute Resolution for South
Australian Companies Engaged with Chinese
Companies
Bethany Nolan
18 November 2013
Academic Supervisor: Professor Gerry Groot
A research project for the Confucius Institute
at the University of Adelaide

2
Acknowledgements
I would like to take the opportunity to thank the all staff at the Confucius Institute at the
University of Adelaide for their valued assistance and support. In particular, I would like
to thank Executive Officer Aaron Duff for his feedback, enthusiasm and assistance with
the survey. I would also like to thank Annette Wheatley for her support during the
initial stages of the project.
I would also like to acknowledge my academic supervisor Prof Gerry Groot. Through his
guidance I have been able to better develop my critical and reasoning skills, ensuring I
produce the best report possible for the Confucius Institute.
Finally I would like to thank everyone who participated in the survey. Their
contributions have added invaluable insight to the report.

3
Executive summary………………………………………………………………………………………………4
Part One: Introduction
Structure……………………………………………………………………………………………………...5
Purpose…………………………………………………………………………………………………….....6
Methodology………………………………………………………………………………………………..7
Survey Results……………………………………………………………………………………………..8
Part Two: Background
The Importance of China…………………………………………………………………………….10
Business Disputes………………………………………………………………………………………11
Dispute Resolution …………………………………………………………………………………….12
Part Three: Dispute Resolution Options
Negotiation………………………………………………………………………………………………..13
Mediation…………………………………………………………………………………………………..17
Litigation……………………………………………………………………………………………….…..20
Arbitration………………………………………………………………………………………………...26
Part Four: Conclusion
Answering the Aims…………………………………………………………………………………..31
Recommendations……………………………………………………………………………………..32
Contents

4
Executive Summary:
This report investigates best practice dispute resolution for South Australian companies
doing business with Chinese companies. The two aims for the report were:
1. What is dispute resolution best practice in the context of Sino-Australian
business disputes?
2. Do South Australian companies currently act consistently with this finding?
To answer these questions, the report draws on both a literature review and a survey
distributed to South Australian companies. The report made the following findings:
Best practice dispute resolution should always begin with negotiation and only move on
to more formal processes if the need arises. The preferred order is first negotiation,
then mediation and finally arbitration or litigation if necessary. Almost all survey
respondents agreed with this order of dispute resolution.
Negotiation is the most culturally sensitive, informal and conducive to maintaining
strong business relationships. In most cases, negotiation will be sufficient for resolving
disputes. When both companies are willing to resolve their dispute but are experiencing
difficulty advancing their negotiation, they may find mediation beneficial. However, as
shown by the survey responses, negotiation and mediation will not always produce a
satisfactory outcome. In such a situation, companies should be prepared to advance to
more formal processes. Companies need to be aware that even though negotiation and
mediation are the preferred options, they should not limit themselves to these methods.
Continuing reform to the Chinese legal system is slowly improving the suitability of
litigation for resolving Sino-Australian business disputes. However, it remains the least
ideal option. Arbitration is generally a better choice. Despite its potential benefits,
arbitration remains an underutilised alternative. South Australian companies could
benefit from a better understanding of the potential for arbitration in Australia, China
and neutral third party countries.
This report concludes that while South Australian companies do understand the
benefits of negotiations, they often fail to appreciate the potential use of other dispute
resolution possibilities. The report recommends that the Confucius Institute could
better inform South Australian companies about their options through business
training.

5
Structure:
The report has been divided into the following parts:
 Part One includes the project’s purpose, methodology and a general overview of
the survey results.
 Part Two summarises the background to the project encompassing the
economic importance of Sino-Australian and Sino-South Australian trade, the
occurrence of business disputes and general dispute resolution best practice.
 Part Three summarises the four dispute resolution methods investigated
(negotiation, mediation, litigation and arbitration). This section brings together
the literature review and findings arising out of the survey in relation to benefits
and disadvantages for each method. Each method concludes with recommended
advice to South Australian companies on the use of that particular method.
 Part Four answers the two main questions motivating the project and makes
recommendations to the Confucius Institute on training pertaining to this topic.
Part One: Introduction

6
Purpose:
The purpose of this report is to investigate dispute resolution best practice in the
context of business disputes between South Australian and Chinese companies.
Business with Chinese companies can be a lucrative undertaking for South Australian
companies. But, as business between South Australia and China grows, so too does the
occurrence of business disputes. While disputes are a common occurrence in business
relations, business disputes with Chinese companies come with unique challenges for
South Australian companies.
It is important that South Australian companies have an adequate understanding of
their dispute resolution options as well as risk awareness. While the same dispute
resolution methods that are normally employed by South Australian companies are still
available, different factors influence their suitability for Sino-Australian business
disputes.
This research project had two main aims. They were to answer the following questions:
business disputes?
It is hoped that the data collected as a part of this report will provide an understanding
of the suitability of various dispute resolution methods for Sino-South Australian
business disputes. It is also anticipated that the data collected will illustrate current
trends in employing dispute resolution methods by South Australian companies who
have/might experience a dispute. It is hoped that the data and recommendations in this
report will assist the Confucius Institute to tailor advice on this subject for future
clients.

7
Methodology:
The methodology for this report involved a combination of a literature review and a
survey.
Literature review:
The purpose of the literature was to identify the important factors that influence Sino-
Australian dispute resolution. These included cultural, legal, political and business
practice differences between the two nations and the impacts that these differences can
have on the suitability of different dispute resolution methods. The literature review
revealed that the most popular dispute resolution methods are negotiation, mediation,
arbitration and litigation. This is why these four methods are the focus of the report.
The literature review uncovered various Sino-Australian best practice dispute
resolution opinions from academic, legal and government perspectives. This included
concerns and benefits for each method.
Survey:
A survey was distributed to investigate Sino-South Australian dispute resolution in
practice, the second aim of the project. The collection of data from South Australian
companies was important for making the report specifically relevant to South
Australian companies. As the Confucius Institute’s clients are South Australians, this
was more preferable than data relevant to Australian companies generally.
A survey was created online using Qualtrics. Since the survey was completely
anonymous, the survey’s opening questions sough to establish a general picture of each
respondent’s business type, the number of Chinese companies it does business with and
the length of engagement with Chinese companies. Respondents were then asked
whether they had previously experienced a business dispute with a Chinese company.
Respondents who answered ‘yes’ were directed to questions about the dispute’s
resolution. Respondents who answered ‘no’ were directed to questions about how they
would hypothetically use dispute resolution. All respondents were asked:
 Whether their business contract included a dispute resolution clause;
 What law they agreed to be bound by;
 What jurisdiction they did/would attempt dispute resolution in;
 Which methods they did/would use;
 Whether there were any methods they would avoid using.
Respondents who had experienced a dispute were also asked how satisfied they were
with the outcome of dispute resolution.

8
Survey Results:
The survey questions were emailed to the Confucius Institute’s business contacts and
clients. In total, fourteen responses were received. The majority of respondents
answered all of the questions asked.
Many of the respondents took the time to qualify their responses with additional
comments. Data and comments relating to dispute resolution generally are referred to
in Part Two. The data and comments collected from the survey which specifically relate
to the use of a particular dispute resolution method are referred to in Part Three.
The following tables present the general data collected:
What type of business does your company conduct?
Imports 5
Exports 3
Services 9
Total Responses 14
How many years has your company been engaged in
business with Chinese companies?
Less than 1 year 3
1 – 3 years 3
3 – 6 years 3
More than 6 years 5
Total Responses 14
How many Chinese companies does your company do
business with?
Two Respondents 1, 4
Single Respondents 2, 7, 8, 10, ‘only a few handful
at a time’, ‘a few hundred’ and
‘currently none’
Total Responses 11
Has your company experienced dispute with a Chinese
company which resulted in a need for mediation or a legal
dispute?
Yes 3
No 9
Total 12

9
Does your contract include a dispute resolution clause?
Yes 9
No 3
Total 12
If yes, which method is stipulated?
Negotiation 4
Mediation 2
Arbitration 2
Litigation 0
Negotiation, Mediation,
Arbitration and Litigation
1
Under which country’s law did you agree to be bound by in
your business contract?
Australia 7
China 3
Other 1 (Although the final
respondent prefers to be
bound under Australian laws,
their Chinese counterparts will
not always agree)
Total 11
For companies that had experienced a dispute: In which
jurisdiction did you try to resolve the dispute?
China PRC 2
Australia 1
Total 3
For companies that had not experienced a dispute:
Hypothetically, if your company was to experience a dispute,
in which jurisdiction would you try to resolve it?
China PRC 0
Australia 7
Hong Kong 1
Other 1 (Italy)
Total 9
Part Two: Background

10
The Importance of China:
China is a growing economic power and is predicted to overtake the United States as the
world’s largest economy by 2025.1 Over the past three decades, China’s economy has
grown to US$7.7 trillion with an average growth rate of 10 per cent a year.2
As a consequence of this economic growth, China has experienced increased
urbanisation and the emergence of the world’s largest middle class. The consumer
market in China is predicted to become the world’s second largest by 2015.3 With
growing disposable income, there is increasing demand within China for financial, legal
and health services, as well as high-quality food, consumer goods and entertainment.
Additionally, the increasing population, urbanisation and subsequent construction in
China have resulted in an increasing demand for raw materials. Australia is well
equipped to provide many of these.
China’s economic grow has had a direct positive impact on Australia’s economy. China
has become Australia’s largest two-way trading partner, and according to the National
Bureau of Statistics China, Australia was the single largest destination for outbound
direct investment in 2011.4 In 2011, HSBC Holdings estimated that China’s economic
growth would increase Australian exports to China by 7 per cent every year between
2012 and 2016.5 In 2012, trade between Australia and China was in excess of AU$125
billion.6 Trade with China is now of indisputable importance to the Australian economy,
and this will only continue to grow.
South Australia:
Trade with China directly benefits South Australia’s economy. China is the largest
market for both South Australian exports and imports.7 According to the Australian
Bureau of Statistics’ most recent State and Territory Statistical Indicators Report,8 South
Australian exports to China for the 2010-11 period equated to AU$2.2 billion, a 73 per
cent increase from the previous 12 month period. Chinese imports to South Australia
were AU$1.2 billion during the same period.
1 Department of Foreign Affairs and Trade (DFAT). China Country Strategy. (Canberra, 2013), 3.
2 Department for Manufacturing, Innovation, Trade, Resources and Energy (DMITRE). South Australia-
China Partnership: A Shared Future. Directions Paper April 2012. (Adelaide, 2012), 8.
3 DFAT. China Country Strategy, 3.
6 DFAT. China Country Strategy,2.
7 DMITRE, A Shared Future, 8.
8 Australian Bureau of Statistics, State and Territory Statistical Indicators, 2012, Cat. no. 1367.0. Canberra ,
2012, ‘South Australia,’
http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by+Subject/1367.0~2012~Main+Features~Value+o
f+Imports+and+Exports~5.28

11
A joint research project between the Confucius Institute and the Australia China
Business Council (SA) published in 2011 found that 4500 jobs in South Australia are
dependent on exports to China.9 Growth in South Australia’s exports to China has
mainly been fuelled by the mining sector. Other major exports include wine, wheat,
meat and wool.
While already immense, the South Australian government is eager to increase trade and
investment with China to help secure South Australia’s economic future. To this end, the
South Australian Government released the South Australia-China Engagement Strategy
in December 2012. One of the strategy’s key actions included building and supporting
‘China-ready Australian businesses’.10 An essential component of being ‘China-ready’ is
understanding the legal environment surrounding Sino-Australian commercial dealings.
Business Disputes:
While the majority of Australian companies manage to do business with Chinese
companies without any significant problems arising, like all international commercial
activities, there can be considerable risks to doing business in China. As Australian
business activity has increased in China, so too has the number of Sino-Australian
commercial disputes.11 One survey respondent commented that “despite many years
working on international contracts, my China experience was disastrous “. The
respondent went on to label China “a minefield” for doing business.
In response to the increase in business disputes, the Australian Government launched
the Doing Business in China initiative in April 2013. The initiative is a partnership
involving peak industry bodies including the AustCham Greater China, the Australia
China Business Council, the Law Council of Australia and the Business Council of
Australia. The importance of the initiative has been highlighted through its
implementation as a part of the 2012 Australia in the Asian Century White Paper.
Through the initiative, the Australian Government hope to help minimise the severity
and frequency of Sino-Australian commercial disputes.
Doing Business In China Initiative:
The initiative seeks to inform companies about the risks of doing business in China and
how to manage those risks. Advice for managing business risks and dispute resolution is
relevant to both Sino-Australian commercial ventures based both in China and also in
Australia.
9 DMITRE, A Shared Future, 9.
10 Department for Manufacturing, Innovation, Trade, Resources and Energy. South Australia- China
Engagement Strategy. (Adelaide, 2012), 22.
11 Austrade. New Government Initiative: ‘Doing Business in China’. Australian Government. March 2013.
http://www.austrade.gov.au/Export/Export-Markets/Countries/China/Doing-business/Doing-
business#.UjpuQMZqncg .

12
To minimise the occurrence of business disputes, the initiative suggests undertaking the
following actions prior to initiating commercial dealings:
 Investigate the market
 Obtain professional legal advice
 Conduct thorough due diligence
 Commit to the highest levels of corporate behaviour
 Become familiar with both Australian and Chinese laws relating to business
activities
Dispute Resolution:
If a dispute does arise, it is important that companies are well prepared to manage the
dispute successfully. The initiative stresses that the key to successful resolution of
commercial disputes is preparation.12 Before beginning commercial dealings,
companies should make themselves aware of the various dispute resolution options
available and evaluate which method or methods best suits their company’s specific
commercial needs.
In general, the initiative advises that dispute resolution should begin as low key as
possible and only move on to more formal processes if the need arises.13 As such,
companies should initially undertake negotiation before moving on to mediation.
Companies should only pursue arbitration or litigation if the earlier dispute resolution
processes fail to yield a suitable solution. The results of the survey indicates that South
Australian companies also believe this to be the ideal order. Of the eleven respondents
who answered a question which asked them to rank the four dispute resolution
methods in the order they should be used answered, eight answered: 1. Negotiation, 2.
Mediation, 3. Arbitration and 4. Litigation. One simply answered 1. Negotiation and 2.
Mediation. This respondent previously indicated that they would avoid litigation and
arbitration. Two respondents ranked arbitration second and mediation third.
Through the initiative, the Australian Government strongly promotes the use of
arbitration clauses as an effective, but underutilized dispute resolution mechanism.14
12 Austrade, New Government Initiative.
13 Austrade, New Government Initiative.
14 Department of Foreign Affairs and Trade, Austrade, Attorney-General’s Department and IP Australia.
Doing Business in China: An Australia in the Asian Century White Paper. (Australian Government, May
2013), 1, http://www.austrade.gov.au/ArticleDocuments/1358/Doing-Business-in-China-discussion-
paper.pdf.aspx

13
Negotiation
First Point of Call:
It is advisable that negotiation always be the first method employed by a South
Australian company when a commercial dispute arises with a Chinese company.
Negotiations are an attractive option because they do not require submission to an
external body, enabling the process to be flexible, informal, private and procedurally
simple.15
In the context of Sino-Australian commercial disputes, negotiation is also the most
culturally preferable option. Under both Confucian and China Communist Party (CCP)
ideology, disputes should be resolved without the use of the courts. Some
commentators go so far as to describe litigation in China as being a “moral failing”.16
Litigation is also considered bad for publicity.
In practice, many foreign companies show a much greater willingness to resolve
disputes in China through negotiation than they typically would in their home country.17
The preference for using negotiation to resolve Sino-South Australian business disputes
was indicated clearly through the survey. All eleven survey respondents who ranked the
different methods in the order indicated that negotiation should be the first method
attempted for resolving disputes. Out of the nine respondents who have dispute
resolution clauses as a part of their business contracts, four have contracted to resolve
any disputes through negotiation.
The nine respondents who had not experienced a dispute were asked which method
they would hypothetically use should a dispute arise. All nine answered ‘negotiation’.
Only one also included mediation and arbitration in their answer. Some respondents
commented:
15 Edwin H. W. Chan and Henry C. H. Suen, “Dispute Resolution Management for International
Construction Projects in China,” Management Decision 43, no. 4 (2005): 596.
16 Philip C. C. Huang, Chinese Civil Justice, Past and Present. (Maryland: Rowman & Littlefield Publishers,
2010), 145.
17 DFAT et al., Doing Business in China, 4.
Part Three: Dispute Resolution Options
“No need in suing each other, negotiation is better”
“Because it usually makes more commercial sense to
negotiate vs going the legal route”

14
Preference for negotiation may be in response to an understanding of China’s cultural
predisposition to negotiation, or it may be in response to unfamiliarity or distrust of the
Chinese legal and arbitral systems.
The Potential For Problems:
Negotiation is clearly the most popular avenue, unfortunately survey results illustrate
that it is not always successful. The three respondents who had experienced a business
dispute with a Chinese company all used negotiation to resolve their disputes. None of
these respondents was overly happy with their dispute’s outcome.
Respondent 1: pursued negotiation in Australia. Respondent 1 did not feel as though
the negotiations yielded any substantial results and was prepared to advance to
litigation. However, following the involvement of lawyers, the Chinese company paid
their outstanding debts. Respondent 1 indicated that they were “somewhat satisfied”
with the outcome.
Respondents 2 and 3: Both used negotiation and mediation in China to resolve their
disputes. Both indicated that they were “very dissatisfied” with their dispute outcomes.
Respondent 2 does not currently do business with any Chinese companies and would
warn other small businesses to “steer clear of China unless they are prepared hard
times”. Respondent 3 suggested that the key to successful business and resolving
potential disputes are the parties themselves, advising others to “foster friendships with
trusted manufacturing or assembling companies and avoid doing business with loud,
overly friendly and chummy sales people from trading companies”. The government’s
Doing Business in China initiative gives similar advice, noting that “the most common
regret expressed by Australian businesspeople who have encountered disputes and
worse, is that they didn’t put enough effort into [choosing the right business partner]”.18
18
Austrade, New Government Initiative.
“Business is to be dealt with diplomacy and negotiation to
create long lasting relationship and success in both parties”
“Negotiation is the fastest likely way to resolve”

15
The Cultural Clash:
One reason why negotiations might fail stems from the differences between Australian
and Chinese cultural and business practices. The clash of these different perspectives
can frustrate the negotiating process.
Chinese businesspeople place great emphasis on the relationship between the parties.
Mutual trust and the development and sustainment of personal relationships may be
considered more important than legal technicalities.19 When a dispute arises over
contracted terms, Chinese companies will tend to renegotiate those terms to preserve
their relationship for future commercial dealings. Australian companies, on the other
hand, tend to place significant emphasis upon legal rights and obligations. For
Australian companies, a breach of contractual terms will generally result in termination
of the contract and damages for any losses incurred.
Consequently, these two differing perspectives may lead to two different and potentially
conflicting sets of goals. While an Australian company may want adherence to legal
obligations, a Chinese company may want recognition of an inability to comply with
current obligations and instead want renegotiated obligations in order to preserve the
relationship.
This situation is illustrated in practice by Respondent 1 who shared the following story:
19
DFAT et al., Doing Business in China, 4.
“The problem arose when a contract to deliver a service to a
Chinese business owner running a business in SA was not
honoured by him with him attempting to not pay for the
service by reverting to Chinese business practices. He felt
because he had built up a relationship with us through
entertaining us here and in China he would not have to pay
for the services. He tried to negotiate his way out of paying
instead of honouring our agreement. He said it was the
Chinese way to help out friends for free. We no longer
provide a service to his organisation. Nor are we friends!”

16
Advice to South Australian companies:
It is important that South Australian companies are aware of these cultural
differences and that they are able to determine, during the course of
negotiation, whether the negotiation is proving to be a positive and
productive mechanism for resolving their business dispute. If a South
Australian company believes that the negotiations are not producing any
beneficial outcomes, they should be prepared to advance to more formal
processes. Otherwise, such companies may find themselves with an
unfavourable outcome or, potentially, no outcome at all.

17
Mediation
Why Choose Mediation:
When parties are unable to resolve their dispute through negotiation, the next step
should be to attempt mediation. China has traditionally had a strong preference for
mediation.20 Mediation involves the use of a third party for the facilitation of
discussions and agreement between the parties. Unlike litigation and arbitration, the
parties themselves remain responsible for resolving the dispute.
Mediation requires mutual trust and concerted efforts by both sides to come to a
resolution.21 In this way, mediation, like negotiation, can help preserve the business
relationship between the parties. When properly framed, mediation can also prove to be
a much quicker and cheaper option than adjudicative measures.22
Under China’s Civil Procedure Law’s (CPL) 2013 amendments, Article 194 allows
parties of a mediated agreement to apply to the court for judicial confirmation within 30
days of the agreement taking place.23 A court-confirmed mediation agreement is
enforceable under Article 195.
The Political Push:
In recent years, trial rates in China have been falling and the number of mediated cases
rising.24 This situation is not unique to China. Alternate dispute resolution methods,
such as mediation, are also increasing in Australia. The difference between the two
situations is that the preference for mediation in China may have a more political
aspect.
From the 1950s until 1978, mediation was used by the CCP as a political apparatus for
the transmission of party doctrine and to correct “feudal thinking”, as well for the
resolution of disputes.25 From 1978 onwards, court adjudication was advanced as the
preferred forum for dispute resolution. It appears as though the CCP is again actively
promoting mediation as the preferred forum. A normative document distributed by the
Supreme People’s Court (SPC) in March 2007 instructed courts to mediate civil disputes
whenever possible.26 The new CPL Article 122(KW) now requires parties to first
attempt mediation before filing their claim. This is still a voluntary exercise and the
courts will not interfere with the commencement of litigation. The CCP has also been
20 Tim Ambler, Morgan Witzel, and Chao Xi. Doing Business in China. (London: Routledge, 2009), 116.
21 Chan and Suen, “International Construction Projects in China,” 596.
23 “China’s Third Revision of the Civil Procedure Law,” Ariel Ye, King & Wood Mallesons, last modified
October, 2012, 1, http://www.kingandwood.com/Bulletin/ChinaBulletinContent.aspx?id=ce8bba49-f56a-
4626-b6d6-266a7be48e8e
24 Carl F. Minzner, “China’s Turn Against Law,” The American Journal of Comparative Law 59, (2011): 935-
6.
25 Minzner, “China’s Turn Against Law,” 941.
26 Ambler, Witzel and Xi, Doing Business in China, 123.

18
promoting mediation through the use of an ideological ‘model judge’ campaign and
‘target responsibility systems’ that give higher financial awards to judges who mediate
cases instead of adjudicate them.27
One lawyer in Carl F Minzner’s article ‘China’s Turn Against Law’ described the negative
consequences of this as follows: 28
The occurrence of such a situation may lead to an extension of the entire process,
resulting in unnecessary delay and expense. Arbitral commissions also commonly
require parties to mediate as a part of the arbitral process. Considering parties may be
directed to mediation after or during arbitration or litigation, it is in the best interests of
the parties to initiate dispute resolution through mediation before arbitration or
litigation.
Survey Results:
Almost all respondents agreed that, after negotiation, mediation should be the second
method attempted. None of the respondents specifically mentioned any benefits,
preference or issue with mediation. In comparison, negotiation, arbitration and
litigation all received both positive and negative comments from various respondents.
This may indicate that mediation is the least controversial of the four methods.
However, as already mentioned, mediation is not always sufficient for resolving
disputes.
27
Minzner, “China’s Turn Against Law,” 949, 955-6.
28
Minzner, “China’s Turn Against Law,” 972.
“In some cases, Chinese judges are pressing
[parties] to mediate after they have actually
conducted a full trial – they do not want to issue a
decision. They do this to protect their own judicial
evaluations, raise their mediation rates, and guard
against negative consequences of verdicts that are
appealed or that generate citizen petitions”

19
Advice to South Australian companies:
Parties should always attempt mediation before litigation or arbitration as it
is a much cheaper option and in practice parties to litigation or arbitration
will often be referred to mediation. Successful court- or commission-referred
mediation indicates that companies might have been able to resolve their
dispute directly through mediation, therefore avoiding extra costs incurred
from litigation or arbitration proceedings.
Mediation is also preferable for companies wanting to continue doing
business together in the future. Litigation and arbitration are both adversarial
processes that involve parties fighting for their own rights rather than finding
a mutually agreeable solution. This could negatively impact on the existing
business relationship. Companies should therefore attempt mediation on
their own initiative before attempting litigation or arbitration.

20
Litigation
If negotiation and mediation fail to yield a resolution, the final step is either litigation or
arbitration.
Sino-Australian Court Judgments
Companies that use litigation can do so in either Australia or China. PRC contract law
allows contracts that involve a foreign connection to be governed by foreign law and to
be litigated in a foreign court.29 This option may be attractive to Australian companies
doing business in China because of their greater familiarity with the Australian legal
system. Out of the survey respondents, 7 had contracted under Australian law and 3
under Chinese law. One final respondent commented that they always try to contract
under Australian law but sometimes their Chinese business counterpart disagrees with
this.
Dan Harris from China Law Blog notes that although foreign parties may feel more
comfortable contracting to be governed by their own legal system, in reality, submitting
to Chinese law might not be such a bad idea. 30 A foreign judgment against a Chinese
company on its own will have no value unless the Chinese company has assets in that
foreign jurisdiction. Otherwise, to be effective, a foreign judgment against a Chinese
company needs to be enforced in China. This enforcement is possible in principle but in
practice can be difficult.31 Although the Supreme Peoples’ Court (SPC) does have an
ongoing campaign to improve enforcement of both domestic and foreign judgments,32
enforcement of domestic judgments remains easier than enforcement of foreign
judgments. At this point in time, companies should be aware that contracting to litigate
a dispute outside of China PRC may not yield any worthwhile result. The exceptions to
this are the judgments of Hong Kong courts which are enforced just as readily as those
by PRC’s courts.33
Litigation - The Last Resort:
The results of the survey clearly show that litigation is the least preferred method. Nine
respondents indicated they would either avoid using litigation or only use it as ‘a last
resort’. This aligns with the literature on dispute resolution in China. Why do South
Australian companies not consider litigation to be a suitable method for dispute
resolution with Chinese companies? There are two reasons:
29 “Overview of Doing Business in China,” Zeng Xianwu, King & Wood Mallesons, last modified March 1,
2012, 4.9, http://www.chinalawinsight.com/2012/03/articles/intellectual-property/overview-of-doing-
business-in-china/
30 “Five Things About China Deals That Differ From the West. Aspiration Matters,” Dan Harris, China Law
Blog, last modified March 4, 2010,
http://www.chinalawblog.com/2010/03/five_things_about_doing_china.html
33 “Overview of Doing Business in China,” Zeng Xianwu, King & Wood Mallesons, 4.9.

21
1. Damaging to the business relationship
2. Western distrust of the Chinese legal system
1. Damaging to the Business Relationship
As previously mentioned, the importance of business relationships in Chinese business
practice means litigation is often an undesirable option. The adversarial process
involved can be damaging to the relationship and trust the two parties have developed.
The repercussion is that companies are less likely to continue doing business together
in the future.
Some respondents commented:
2. Western distrust of the Chinese legal system:
Survey respondents made the following comments about litigation in China:
One respondent even commented that if a dispute was to arise and was unable to be
resolved through negotiation and mediation, then they would rather rely on their
insurance to cover any losses than undertake litigation against a Chinese company.
Some South Australian companies clearly distrust the Chinese legal system posing the
questions, what is the source of this distrust and is it this distrust still valid in 2013?
“It creates conflict and bad reputation [for
the] company's image”
“Generally I would see litigation as the last
resort because of the time, expense and great
likelihood [of] damage to the relationship”
“We would be throwing good money away as the Chinese are
biased in favour of Chinese companies and view corruption as
legitimate”
“[Litigation is] not relevant in China”
“I have more confidence in the Australian justice system”

22
Legal History
The legal system in China has undergone significant changes in the past century. Shortly
after its foundation in 1949, the PRC government dismantled the former Chinese legal
system, cutting the path for the new socialist regime.34 The judicial system was
denounced as being the protector of the bourgeois social order and in direct contrast to
the ideology underpinning China’s Cultural Revolution.35 During that period, lawyers
were outlawed, courts were demoted, and laws were replaced with Party policies and
occasionally Maoist philosophy.
It was not until China’s opening-up policy, introduced in 1978, that the Chinese legal
system began to re-emerge.36 Following this, the 1980s and 1990s saw an “explosion of
litigation” as courts materialised as the primary forum for commercial dispute
resolution in China. Compared to Australia’s long legal history inherited from English
law, the legal system in China is relatively new.
Western Concerns:
The following are concerns commonly held by Western parties:
Litigation outcomes are difficult to predict:
 The Chinese legal system is a civil law system where the application of law is
determined independently from previously adjudicated cases.37
 Australian legal outcomes are often predictable because of legal precedence of
previously adjudicated cases.
 Predictability of outcomes in Australia encourages most parties to settle out of
court.
Equity over legal interpretation
 Chinese courts may be more interested in ‘justice’ than in legal interpretations of
the law.38 Courts do not like legal technicalities and prefer decisions that
promote equity.
 Legal rights and obligations might not be enforced by Chinese judges.
34 “Overview of Doing Business in China,” Zeng Xianwu, King & Wood Mallesons, 2.
36 “Overview of Doing Business in China,” Zeng Xianwu, King & Wood Mallesons, 1.
38 “China Courts. You Ain’t In Kansas Any More,” Dan Harris, China Law Blog, last modified June 7, 2010,
http://www.chinalawblog.com/2010/06/china_courts_you_aint_in_kansas_any_more.html

23
Judicial competence
 Chinese judges do not require the same level of experience in legal dealings as
their Australian counterparts. Aspiring Chinese judges only need two years legal
experience,39 opposed to Australia where candidates must first become
reasonably well known legal personalities before nomination to the position of
judge.
 Chinese judges have less developed judicial reasoning skills.
Protectionism
 Chinese courts will favour Chinese parties and decide in their favour. Ambler et
al suggest that this is particularly so when key local interests are at stake in a
commercial case.40 Undue external influence may pressure courts to favour the
local party.
 Courts are subject to Party influence and financially dependent on local
governments.41
Improvement to the Chinese Legal System
Transparency:
 The recent CPL amendments require judgment to be made publically available
under Article 156 unless they involve state secrets, trade secrets or personal
privacy.42
 Articles 152 and 154(3) require judgments to clearly set out the decision and the
reasoning behind it.43
Full compliance with these section remains to be seen in practice.44
Judicial competency
 Judges are required to undergo regular training.
42 “The Changing Face of China’s Civil Procedure Law: Effect of the Recent Amendments,” Hogan Lovells,
last modified January 31, 2013, 2,
http://www.thelawyer.com/Journals/2013/01/31/Hogan_Lovells_The_changing_face_of_China_Civil_Pro
cedure_Law_415008.pdf
43 “New Amendments to PRC Civil Procedure Law Aimed at Increasing Efficiency, Transparency and
Parties’ Autonomy,” Mayer Brown JSM, last modified January 17, 2013, 3,
http://www.mayerbrown.com/files/Publication/a103da29-0076-476e-9264-
92ab2f7b4b27/Presentation/PublicationAttachment/713aa6c3-d4f4-47da-99fb-
96bc51990a48/130117-PRC-Litigation.pdf .
44 “The Changing Face of China’s Civil Procedure Law,” Hogan Lovells,

24
Judicial Guidance:
 The SPC regularly issues binding guidelines on the interpretation of important
statutes.45
 The SPC and local high courts regularly publish authoritative cases with
extensive commentary. This ‘leading case’ system has been in place for at least a
decade and there is an expectation for judges to take these ‘leading cases’ into
account when ruling, bringing greater predictability.46
Improved Enforcement:
 Most Chinese courts have now established a department solely focusing on
enforcement.47 Pre-judgment attachments of assets have also been introduced to
assist the later enforcement of monetary awards.
 The CPL amendments have also introduced new mandatory and prohibitory
judgments, and interim measures, including:
o Orders to freeze the assets of another party (Article 100).
o Order requiring another party to perform or be prohibited from
performing certain acts until judgment (Article 100)
o Pre-litigation (and pre-arbitration) interim measures for the preservation
of property or evidence (Articles 81 and 101).48
Formal processes in China are increasingly mirroring formal processes elsewhere. Both
improved guidance and enforcement appear to have resulted in greater willingness by
Chinese parties to settle their claims.49 Out of court settlement is beneficial to both
parties because it leads to lower costs and minimises the strain on the business
relationship.
45 “Judicial Reform in China and Its Impact on Foreign Investment,” Steve Dickinson, China Law Blog, last
modified October 30, 2012, 2.2, http://www.chinalawblog.com/2012/10/judicial-reform-in-china-and-
its-impact-on-foreign-investment.html
46 Hou, Shumei, and Ronald C. Keith, “A New Prospect for Transparent Court Judgment in China,” China
Information 26, no. 1 (2013): 77.
47 “Judicial Reform in China,” Steve Dickinson, China Law Blog, 2.
48 “New Amendments to PRC Civil Procedure Law,” Mayer Brown JSM, 2.
49 “Judicial Reform in China,” Steve Dickinson, China Law Blog, 2.

25
Advice to South Australian Companies:
Many South Australian companies prefer to avoid litigation in business disputes
involving a Chinese company. However, it is important that South Australian
companies possess some understanding of litigation in China. As China continues
its legal reforms, the number of lawsuits in China is rising, increasing the
possibility that South Australian companies may find litigation brought against
them.
Formal processes in China are becoming increasingly similar to those elsewhere,
and issues with transparency, integrity and enforceability are less obvious in
larger cities and higher courts. However, legal reform in China still has a long way
to go.
For South Australian companies considering litigation in China, legal outcomes
may still be difficult to predict, but this is improving.
Things to note:
 Foreign law firms and foreign lawyers cannot litigate in China.
 Litigation in China must be conducted in Chinese.
 Parties that contract to litigate outside of China will be barred from
litigating in China.
 Generally, there is no award of costs, meaning each side pays their own
court costs.
For South Australian companies considering litigation outside of China, foreign
judgments may be difficult to enforce in China. Hong Kong provides a potential
compromise. Hong Kong can offer a legal system more in line with Australia’s,
with the added benefit of delivering judgments that are easily enforced in China.

26
Arbitration
Why arbitrate?
There are several benefits for pursuing arbitration rather than litigation:
 Greater transparency.
 Parties can choose the arbitrators. In litigation, parties can never choose their
judge.
 Arbitrators have specific expertise in the area of the dispute and may have a
deeper understanding of the factual issue than a judge.
 Less formal.
 Can be faster.
 Decisions are final which means there is greater certainty in decisions. Litigation
has the potential for an appeal, dragging out the process.
 Arbitrations are private and companies can contract to keep the arbitration
confidential.
Australian Government Promotion:
The Australian Government would like to promote the use of arbitration clauses in Sino-
Australian commercial contracts. The government considers arbitration to be an
effective but underutilized dispute resolution option and therefore has made the
promotion of their use a major component of the Doing Business in China initiative.50
In April 2013 the Australian Government concluded a Memorandum of Understanding
with the Guangdong Provincial Government to establish the Australia-Guangdong
Business Cooperation Council.51 It is hoped that the Council will provide an opportunity
to promote the use of arbitration clauses and best practice guidelines for Australian-
Guangdong commercial disputes. The Council will only advise; it will not play an active
role in resolving disputes.
Survey Results:
Two survey respondents indicated that their dispute resolution clauses stipulate the use
of arbitration. One of these respondents had previously experienced a dispute but did
not use arbitration. The respondent only used negotiation and mediation, and indicated
their satisfaction level of the resolution outcome as “very dissatisfied”. It is unknown
why this respondent did not also attempt arbitration as they had contracted to. The

27
other respondent has not experienced a dispute but indicated that, if they did, they
would use negotiation.
Two survey respondents indicated that they would avoid using arbitration. One of these
respondents also indicated that they would avoid litigation. The other respondent
commented that there reason for avoiding arbitration is that “it can be convoluted”.
Although this respondent did not indicate that they would also avoid litigation, they did
still order arbitration ahead of litigation for the proper sequence of pursuing dispute
resolution.
Only one respondent commented on the benefits of arbitration. This respondent
commented that arbitration in Hong Kong is a good option that many South Australian
companies do not know about. This respondent is now working on a website to inform
local businesses on the benefits of arbitration in Hong Kong.
Overall, arbitration does not appear to be a very popular method with South Australian
companies. The apparent lack of interest helps explain why the Australian government
is actively working to promote the use of arbitration clauses in Sino-Australian business
contracts.
Arbitrating in Practice:
The following outlines the requirements and options for parties who do choose to
arbitrate a Sino-Australian commercial dispute:
Requirements for Arbitration
A valid arbitration agreement is essential for both the commencement of arbitral
proceedings and also for enforcement of an arbitral award. Failure to have an
arbitration agreement is grounds for having an arbitral award set aside.52
To be valid, an arbitration agreement must be in writing and expressly include intent by
the parties to submit to arbitration; the scope permitted for arbitration (can be as broad
as ‘any dispute arising out of, or in connection to, the contract’); and designate the
arbitral tribunal.53 It is possible to reach an arbitration agreement after a dispute has
arisen, but usually parties that choose arbitration will have included an arbitration
clause in their operative contract.
52 See Xi Lian, “Cross-Cultural Perspectives on the Business Dispute Resolution System in China,”
Contemporary Readings in Law and Social Justice 4, no. 1 (2012): 402.
53 Lian, “Cross-Cultural perspectives,” 402.

28
Arbitration Enforcement:
Companies can choose to arbitrate in Australia, China or in a neutral third party
country.
Arbitrating In China
Chinese Arbitration Act 1995 allows for ‘foreign-related’ commercial disputes to be
arbitrated outside of China. Although the legislation does not define ‘foreign-related’,
commercial disputes between a Chinese company and an Australian company fit well
within the non-binding judicial interpretations given by the SPC.54
For arbitration in China, the China International Economic and Trade Arbitration
Commission (CIETAC) is the best option. Compared to arbitration elsewhere, arbitration
in China can be ‘restrictive and inflexible’.55 However, courts will most likely enforce a
domestic arbitral award without its own enquiry into the merits of the award.56
Enforcement of awards has been improved by the introduction of a pre-reporting
system which applies to both foreign-related (rendered in China) and foreign (rendered
offshore) arbitral awards in mainland China. Under the system, if a lower court has been
asked to enforce a foreign or foreign-related arbitral award but decides to refuse
enforcement, the lower court must refer the case to the SPC for confirmation. Under the
CPL, the SPC is required to provide its reasoning if it refuses enforcement.57
Refusal:
Domestic arbitral awards can be refused enforcement when the evidence that the award
is based on is forged and when evidence concealed from the arbitrator affected the
fairness of the award.58 Under the new CPL amendments, insufficient evidence to
support a finding of fact or a mistake in legal application are no longer grounds to refuse
enforcement.
An award can also be refused if the award was rendered against a party unfairly. For
example, if the party was not requested to appoint an arbitrator or was unable to
present his case for reasons outside of his control.59 Additionally, an arbitration
procedure conducted out of line with the arbitration rules, or a decision on a matter
exceeding the arbitration commission’s authority, are grounds for refusal.
54 David Howell, James Rogers, and Matthew Townsend. “Chinese Arbitration – Still Distinctive,” Harvard
Business Law Review Online 3 (2013): 198, http://www.hblr.org/wp-content/uploads/2013/04/Howell-
et-al._Chinese-Arbitration.pdf
55 Howell, Rogers and Townsend, “Chinese Arbitration,” 197.
58
CPL Articles 237(4) and 237(5). See “New Amendments to PRC Civil Procedure Law,” Mayer Brown JSM.
59 “Amendments to the PRC Civil Procedure Law and Their Effect on Arbitration in Mainland China,”
Herbert Smith Freehills LLP, last modified May 6, 2013,
file:///C:/Users/Beth/Downloads/Amendments%20to%20the%20PRC%20Civil%20Procedure%20Law
%20and%20their%20effect%20on%20arbitration%20in%20mainland%20China%205%20May%20201
3.htm

29
Arbitrating Outside China:
Australia and China are both signatories to the United Nations Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (hereinafter referred to as ‘the
New York Convention’). Under the New York Convention, arbitral awards rendered in
one signatory country are recognisable and enforceable in other signatory countries.60
Enforcement in other signatory countries under can be refused under a number of
narrow grounds such as public policy. In China, this had generally been interpreted in
line with CPL Article 274 allowing refusal of enforcement of awards that are against the
‘social and public interest’ in China.61 There is concern that arbitration outside of China
may add substantial delay and risk enforcement of the award,62 but enforcement may be
less problematic than commonly thought, especially in urban areas.63 In truth, the
enforcement mechanisms for foreign awards are stronger and more effective than those
for foreign-related awards.64
The New York Convention also means arbitration awards rendered in China are
enforceable in Australia. Earlier in 2013, the Federal Court of Australia granted
enforcement of a Chinese arbitral award against an Australian corporation in
liquidation.65
61
62
“How to Write a China Contract. Arbitration Versus Litigation. Say Where?” Dan Harris, China Law Blog, last
modified August 31, 2013, http://www.chinalawblog.com/2013/08/how-to-write-a-china-contract.html
63
64
Howell, Rogers and Townsend, “Chinese Arbitration,” 198.
65
Eopply New Energy Technology Co Ltd v EP Solar Pty Ltd [2013] FCA 356. See “Foreign Arbitral Award
Enforceable Against an Australian Corporation in Liquidation,” James Wittaker and Jin Ooi, Corrs Chambers
Westgarth, last modified May 10, 2013, http://www.corrs.com.au/publications/corrs-in-brief/foreign-arbitral-
award-enforceable-against-an-australian-corporation-in-liquidation/

30
Advice to South Australian Companies:
When a company wishes to pursue a more formal option of dispute
resolution, arbitration provides many benefits over litigation.
The best arbitral commission for a dispute depends on the particular facts of
the dispute, the available resources and convenience.
Australian companies may be concern that arbitration in China might give the
Chinese party an advantage. Similarly, Chinese parties may be just as
concerned about submitting to foreign arbitration. In such cases, Hong Kong
can be an acceptable compromise to both parties.65
Hong Kong can provide a degree of familiarity to both Australian and Chinese
parties while providing neither with a ‘home advantage’. While still a part of
China, Hong Kong is a location that offers a good command of English,
appreciation of Western concepts of law and strong legal infrastructure. The
Hong Kong International Arbitration Commission (HKIAC) offers both
‘unmanaged’ and ‘administered’ arbitration. The option of unmanaged
arbitration at the HKIAC allows parties to manage their own arbitration. This
could prove to be a more collaborative effort, making it a good choice for
parties who want to preserve a good business relationship.
Additionally, arbitral awards rendered in Hong Kong are the easiest foreign
awards to be enforced in China due to a special arrangement between PRC
and Hong Kong.66

31
Answering the Aims:
business disputes?
Negotiation should always be the first dispute resolution option used. It is the
most culturally sensitive, informal and least adversarial of the dispute resolution
methods. When negotiation does not produce a suitable resolution, mediation
should be considered next. If both these methods fail to resolve the dispute,
companies should then, and only then, consider pursuing either arbitration or
litigation. In the context of Sino-Australian disputes, arbitration appears to be
preferable over litigation. The suitability of both methods is improving.
The South Australian companies that completed the survey indicated a general
propensity towards this order of dispute resolution. Negotiation was
unanimously chosen as the first step in Sino-South Australian dispute resolution.
The majority indicated that mediation should be attempted before arbitration.
All respondents chose litigation as the final option. Respondents had generally
negative opinions of the use of litigation.
Part Four: Conclusion

32
Recommendations:
 South Australia companies appear to already possess a general
understanding of dispute resolution best practice for business disputes with
Chinese companies. It seems common knowledge that negotiation is the
most preferable option and litigation is generally considered as a ‘last
resort’.
 What South Australian companies might not realise is that negotiation is not
always the best option. As shown by the survey responses, negotiations
might not produce satisfactory outcomes. In some circumstances, more
formal processes might be necessary. The Federal government has stressed
through it’s Doing Business in China initiative that businesses need to be
aware of all their dispute resolution options before engaging in business
with Chinese companies. Advising businesses on the full range of dispute
resolution methods is a potential option for the Confucius Institute.
 Companies may not be aware of the option of arbitration for Sino-South
Australian business disputes. Companies that have considered arbitration
may not be aware of options outside of Australia or China PRC. For example,
Hong Kong or Singapore. The Federal government aims to promote the use
of arbitration clauses through the new Doing Business in China initiative and
this may be an area where the Confucius Institute could assist through
business training.
 As China continues to improve its legal system, litigation in China should
continue to become increasingly similar to litigation elsewhere in the world.
While litigation is currently the least desirable option, this is an area for
continued monitoring.
 Local companies need to be aware how often disputes with Chinese
companies do occur and learn how to minimise the risk of disputes. Above
all, South Australian companies should always seek legal advice from a
lawyer specialised in Chinese business contracts before contracting with a
Chinese company. Having a good contract will put companies in the best
possible situation, but it will not guarantee that a dispute will not occur.

Dispute Resolution Final Report

Recommended

Recommended

More Related Content

Similar to Dispute Resolution Final Report

Similar to Dispute Resolution Final Report (17)

Dispute Resolution Final Report