Guidance

Commercial disputes in China

Advice for British nationals and UK companies in China.

Overview

Disagreements and disputes can occur in the business community in China, particularly involving small companies which may be perceived as vulnerable to pressure. Disputes may arise between companies or between a company and the authorities. We generally refer to such incidents as business or commercial disputes. While the majority of foreign-owned businesses in China operate successfully, commercial disputes can damage confidence and cause concern in the business community.

Who we can help

We can offer advice and consular assistance to British nationals, including dual nationals who are not Chinese nationals. We can offer support to UK-registered companies. We cannot offer assistance to British National (Overseas) (BN(O)s) passport holders in China as the Chinese authorities regard BN(O)s as Chinese nationals. We may not be able to help you if you have arrived in China on a Chinese-government issued travel document, including a Mainland Travel Permit for Hong Kong and Macau Residents (usually known as a “Home Return Permit” or 港澳居民来往内地通行证) card.

What we can do

We can offer basic advice and information on the local legal system. We can offer a list of English-speaking lawyers, though the list may not always include law practices specialising in commercial disputes.

Where to find advice

Foreign & Commonwealth Office Travel Advice provides information and views to help British nationals form their own judgments about travelling to or working in China. This advice is updated regularly.

FCO also provides Overseas Business Risk guidance which covers issues relating to the political, economic and business security environments in China.

The EU SME Centre is an EU-funded body providing free advice to EU companies trading with China, including advice on handling commercial disputes.

You can contact the China Britain Business Council, who may have further experience and useful contacts for commercial disputes issues.

The CBI (Confederation of British Industry) is the UK’s premier business lobbying organisation, providing a voice for employers at an international level.

The most appropriate option will always depend on the circumstances of the case. In general, settling a dispute in a way that avoids litigation or an arbitration procedure is the best way to avoid potentially unnecessary high costs and risks. Companies should carefully consider whether the legal costs are worth the potential benefits, especially since not all these costs are recoverable. Settling disputes through the legal process should not be carried out without the advice of a lawyer who specialises in the laws of the People’s Republic of China.

Before entering into a contract in China you should take appropriate legal advice, both in the United Kingdom and in China. Your lawyer should advise you on including dispute resolution clauses and governing law clauses in the contract to plan in advance how, where and under what law, you want any disputes to be resolved. Chinese law restricts both the choice of law and the types of resolution mechanisms that can be used in China-related commercial contracts, so the contract needs to be drafted carefully. Contracts entered into in the United Kingdom are not generally enforceable by Chinese courts.

Contract fraud is treated as a crime in China and a defendant may be held in custody until the dispute is resolved. There is a distinction in Chinese between fraud in civil law (“qi zha”/欺诈 in Chinese) and criminal law (“zha pian”/诈骗); the latter is taken much more seriously. A company representative or individual accused of “zha pian” may be arrested, placed under a travel ban or held in custody until trial (or until the dispute is resolves.)Be clear on who is the company’s legal representative. Each company in China must have a “Legal Representative” (法定代表人; fading daibiaoren) - an individual with broad powers and potentially unlimited liability. An individual appointed as a Legal Representative may be held personally liable in Chinese law for their company’s debts.

Many foreign enterprises are reluctant to bring litigation in China because they fear local jurisdictions will favour local companies, or that the legal process will be susceptible to outside influence. The People’s Court system has installed an online compliance hotline where parties can report complaints over discrimination in court. If you do decide to take your case to court in China, you should be prepared for a long process. Even if a court finds in your favour, you may find it difficult to have any award enforced.

Where legal action is necessary, most foreign companies operating in China choose to resolve disputes by arbitration rather than litigation. Companies have the option to plan ahead for potential disputes and consider arbitration. Although it is possible for parties to reach arbitration agreement after a dispute arises, in most cases an arbitration clause is better included from the outset.

If the contract has an arbitration clause, it may specify things like: the parties ‘choice of arbitration commission, the place of arbitration and the language of arbitration. The contract may also contain a governing law clause. This gives effect to the choice of law by the parties.

Many companies choose to arbitrate outside mainland China. However, this is not always an option. Chinese law requires certain disputes to be arbitrated in mainland China.

In particular important for foreign parties to be aware that joint ventures operating within China are considered to be domestic Chinese entities. Disputes involving joint ventures will therefore mostly be considered to be domestic disputes.

The China International Economic and Trade Arbitration Commission (CIETAC) is one of the most frequently selected for arbitration held in China. Details of its fee schedule can be found on their website.

Under CIETAC’s Arbitration Rules, in the absence of any agreement by the parties to the contrary, the arbitration will be conducted in the Chinese language.

Intimidation and threatening behaviour

There have been some incidents of foreign nationals being detained as part of a business dispute, usually between Chinese and foreign joint venture partners. In some cases the Chinese partner may send employees or other casually-hired support to surround a facility and refuse to allow the foreign partner to leave until payment has been made. Threats of violence are common in such cases, and stand-offs can last hours or a couple of days. The police may be unwilling to intervene and usually will not do so unless the situation turns violent. It is rare that violence is actually instigated. However, the threat of violence is a recurring theme.

If you or your family have been threatened in the course of a commercial dispute, you should raise this with the local police and obtain a police report. The Chinese authorities are responsible for the safety and security of British nationals while they are in China, and it is important to report your concerns to the police. You can also contact us. However, the British Embassy/Consulate-General cannot take responsibility for you or your family’s safety and security in China.

Travel bans

Where foreign nationals in China become involved in a business and/or civil dispute and the case goes to court, the Chinese government may prohibit them from leaving China until the dispute is resolved. This is known as a travel ban. If you are the subject of a travel ban, you should inform the British Embassy or Consulate-General for that area. In addition to providing a list of English-speaking lawyers, we can:

  • provide you with information about any organisations that may be able to help
  • contact family and friends in the UK if you are unable to do so easily

We may consider approaching the local authorities, taking into account factors such as local law, the reason for the ban and your personal circumstances. But please be aware that intervention by the Embassy or Consulate-General may result in further action, including arrest and detention pending investigation. Detentions can last for several weeks while the authorities decide whether to charge you and bail can be set very high. During the investigation phase of a detention in China, you will not generally be permitted a visit from family or friends; and during some stages of the investigation, your lawyer will not be able to visit you.

What we cannot do

Business disputes are primarily a matter for arbitration or the courts. While we can seek clarification from the authorities over your situation, we cannot intervene directly with the courts or the authorities in every case, in the same way as we would expect another country to respect the UK’s laws and legal processes. Chinese companies or the authorities may react badly to what they perceive as ‘foreign interference’ in Chinese law.

Your first point of contact should be a reputable lawyer with appropriate experience and knowledge of law and business practice in the People’s Republic of China. We are not qualified to offer you legal advice. We cannot pay your legal fees, undertake an investigation or guarantee your safety in China, nor can we get you special treatment because you are a British citizen.

Published 16 April 2013