China's impact on global disputes can be described in three Chinese phrases, says CBLI's Matthew Townsend

Since the Chinese Government urged its companies to 'go global' at the turn of the century, more Chinese businesses are leaving China at the doorstep (zuochuguomen). In the years following the financial crisis, the increase in Chinese outward investment has accelerated as firms seek to take advantage of depressed economic conditions to move into new markets and source foreign technology.

With the Chinese outward investment boom has come a growth in international disputes involving Chinese parties, a trend exacerbated by the relative concentration of People's Republic of China (PRC) investment flows into resource-rich but sometimes turbulent regions in the Middle East and Africa. Also significant is the proportion of these projects which represent 'firsts', whether operationally or technically, for the investor in question, further increasing risk.

china-mapBeneath the surface, there is some evidence that this expansionism is driving a change in the attitude of China's globe-trotting firms towards dispute resolution. Much has been made of the historic aversion of PRC parties to litigation or arbitration, both of which they have traditionally eschewed in favour of informal negotiation and conciliation. Recently, however, China's businesses appear to be becoming increasingly willing to resolve international disputes by legal means. As their executive experience grows and they appoint seasoned legal counsel, Chinese enterprises are developing a more sophisticated understanding of the processes involved.

Our village, our rules

Just as Chinese businesses are becoming savvier in their understanding of the status quo, so too they are becoming better able to push for more 'Chinese' dispute resolution mechanisms. Foreign parties to China-related contracts are increasingly finding themselves under pressure to obey the axiom that when entering a village, one follows the customs (ruxiangsuisu). In practice, this means they are more frequently coming before local Chinese courts or arbitration institutions when resolving these disputes.

When it comes to litigation, foreign parties bringing (or defending) actions against PRC firms have long had little choice but to go before local courts. This is because a judgment given in the UK, US, or any other of a host of significant jurisdictions, will not be routinely recognised by the Chinese courts. The reason: China is not signatory to any significant multilateral enforcement treaties.

Parties to China-related arbitration proceedings, by contrast, have more freedom to conduct their dispute resolution outside the PRC. Enforcement in China is provided for by the relatively streamlined procedure set out in the New York Convention (of which China is a signatory). However, even where arbitration is concerned, Chinese parties are increasingly using their growing bargaining power to negotiate 'Chinese' dispute resolution clauses into their contracts, because of the familiarity and perceived speed and economy of short-form PRC arbitration.

This new assertiveness on the part of Chinese businesses reinforces the effect of pre-existing PRC rules that limit the scope for foreign parties to select arbitration outside of China. One example of such a provision is the prohibition under Chinese law of any form of 'offshore' dispute resolution in the absence of a sufficiently strong 'foreign element' to the dispute in question. This 'foreign element' has been interpreted narrowly – arbitration between two international companies, for example, will not be 'offshoreable' if the contract under dispute is between their Chinese-registered subsidiaries.

A changing menu

While the spotlight shifts towards Chinese and Asian forums, a third factor is impacting the way dispute resolution is conducted in these locations. Recent years have seen rapid changes in the legal frameworks of several of the major Asian arbitration institutions.

This year will see China's pre-eminent arbitration institution, and the world's busiest by caseload, re-engineer its procedural regulations. The new rules of the China International Economic Trade and Arbitration Commission (CIETAC) are scheduled to come out midway through this year, and are expected to usher in many changes, including opening the way for CIETAC to administer arbitrations seated outside of the PRC.

The CIETAC rule changes themselves come in the wake of the root-and-branch reforms of Hong Kong's arbitration regime with the coming into force of a new Arbitration Ordinance in 2011. Adding to the mix the rules of the International Chamber of Commerce (ICC), which itself opened a Hong Kong outpost in 2008, are also changing.

In the short term these changes look to usher in a period of uncertainty as lawyers test and ingest the new provisions. As the phrase goes: until the first person has bitten the sea crab, none of us will know the taste of crab meat. (yongyuzuodiyigechipanxiederen). It is fair to say that given the impact of China on the international disputes environment, international lawyers and businesses will be interested to find out. 

Matthew Townsend (pictured) is director of the China Britain Law Institute (CBLI) and an international disputes lawyer based in Beijing. On 21 June 2012 the CBLI will be organising a panel debate at the London School of Economics and Political Science on the topic of London's future as a centre for China-related dispute resolution.