Forum Shopping in China: CIETAC vs. UNCITRAL
Lacking knowledge of and exposure to Chinas judicial and arbitrational system, foreign companies usually worry about dispute resolution clauses more than any other clause in a contract. Deciding which arbitration tribunal and what arbitration rules to specify becomes a sensitive and important aspect of contract negotiations for wholly foreign owned entities (WOFE) and cooperative joint ventures (CJV).
Excerpt:
I. Choice of Arbitration Tribunal
Contracts in which one party is a foreign entity will contain foreign elements, allowing the parties to choose their jurisdiction without restriction under PRC law. The parties to such a contract may decide at their discretion whether to choose an arbitration tribunal within China or in another country, or resort to ad hoc arbitration to resolve disputes.
A WOFE or CJV established or to be established by a foreign company in China is generally regarded as a Chinese company under PRC law. Therefore, under PRC law, the contracts for the transactions carried out by a WOFE or CJV do not involve any foreign elements. If the contracting parties in a transaction between PRC entities choose a foreign arbitration tribunal, Chinese courts may hold the arbitration clauses in the contract void on the basis that the parties intend to elude PRC law. Therefore, it is recommended that a WOFE or CJV shall appoint a Chinese arbitration tribunal in contracts which do not contain a foreign element.
II. Choice of Arbitration Rules
In most cases, a WOFE or CJV actually appoint a PRC arbitration tribunal (often China International Economic and Trade Arbitration Commission, CIETAC) for dispute resolution to comply with PRC law's and courts' preference for domestic arbitration tribunals for domestic companies. However, since WOFEs and CJVs may not be familiar with China's arbitration system, they will often include in the dispute resolution clause of contracts a qualification requiring application of non-Chinese arbitration rules, e.g. United Nations Commission on International Trade Law rules (UNCITRAL Rules), under the CIETAC arbitration procedures.