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Consequences of Using Foreign Arbitration Laws

When a foreign organization came to a Chinese business lawyer for assessing an arbitration, they wanted the arbitration between its China WFOE (Wholly Foreign-Owned Enterprise) and a Chinese domestic company with which it had contracted to be held at a foreign country, and not in China. The contract that was signed by the foreign organization for arbitration in the foreign company wanted the Chinese lawyers to assess its chances. This arbitration comes under the law that is commonly called “the Domestic Rule” and it mentions that only “foreign-related” disputes can be arbitrated outside China.

A Chinese business lawyer who represents Chinese companies with overseas investors are very much aware of this law. They exactly know how to use it for a Chinese company to get advantageous. But the foreign lawyers are totally obscure about this rule or law. Check your China Joint Venture Agreement, and in the event that it accommodates interior organization debate between your organization and your Chinese joint venture accomplice to be settled through mediation outside China, you have most likely been deceived by the Chinese legal advisor who knew precisely what she/he was doing. What’s more, this is basically the standard when the remote party in a China Joint Venture commits the gigantic error of utilizing its joint venture accomplice attorney to draft the joint venture ascension.

Under Chinese law, for a dispute involving a Chinese company to be viewed as “foreign-related,” it typically must involve at least one of the following:

  • At least one foreign party. Note that China WFOEs and Joint Ventures are usually not considered to be a foreign party. It is to be noted that Hong Kong, Taiwan and Macau entities are generally viewed as foreign parties.
  • The facts or the subject matter that give rise to the lawsuit occurred or exist outside Mainland China.

If you secure an outside arbitral honor against a Chinese organization and you don’t have a reason for having the capacity to go around the Domestic Rule, there is a decent shot that no China court will uphold your arbitration honor. In the event that the Chinese organization you are seeking after has resources outside China, there may not be any concerns, yet in the event that it doesn’t or on the off chance that you are trying to change the operations of a China Joint Venture, your arbitral honor will most likely be useless.

The best approach to maintain a strategic distance from this kind of issue is to draft your agreements to accommodate debate to be settled in China, either in its courts or before one of its local arbitral bodies.

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