How to negotiate a purchase contract with Chinese supplier properly? Part 3
By Steven Chow
(6) dispute settlement
a. Lawsuit or arbitration
The question for dispute settlement is lawsuit or arbitration. When I just graduated from law school and joined a big import & export company, I was asked by the general manager to review their sales contract. The first thing I noticed on the contract was that the dispute settlement clause said that both parties can choose litigation and arbitration as dispute resolution methods.
According to article 5 of Arbitration Law of People’s Republic of China, Whereas the parties concerned have reached an agreement for arbitration, the people’s court shall not accept the suit brought to the court by any one single party involved, except in case where the agreement for arbitration is invalid.
So if you choose arbitration as dispute resolution method, you can’t file a lawsuit with the same claim, and vice versa. You either choose lawsuit, or arbitration, but you can’t choose both. A big manufacture company with a deep root here in China like my first employer can make such a mistake, I think many of our fellow users(mostly small and medium sized companies that don’t have a connection in China) will probably make the same mistake too.
b. why arbitration?
We suggests our customers choose arbitration instead of lawsuit as dispute settlement method based on the following:
Reason No. 1 Lawsuit is lengthy and expensive
According to the Civil Procedure Law of People’s Republic of China, there are two instances(first instance and second instance) for a civil case. Normally an international purchase contract related lawsuit will last more than one year, it is money and time-consuming. While for arbitration, the arbitration award is final, it is easy and fast.
Reason No. 2 Territorial Jurisdiction
According to the Civil Procedure Law of People’s Republic of China, A civil lawsuit brought against a legal person or any other organization shall be under the jurisdiction of the people’s court of the place where the defendant has his domicile. So the independence of the court of jurisdiction, the logistically inconvenience are the issue we should never neglected.
Steven Chow, Managing Director for the China Inspection Company Chinawhy.net
This is the third and final part of “How to negotiate a purchase contract with Chinese supplier properly?”. Here you can find part 1 and part 2.
July 24th, 2008 at 4:48 am
It is never this simple.
For example, if your biggest concern is your OEM manufacturer making and marketing your product after you move on to another manufacturer, you should consider litigation over arbitration because in litigation you have a chance of getting a court order stopping the manufacturing of your product.
I would also add that arbitration is not always fast and cheap either, especially when you throw in the actual cost of the arbitrators. On top of that, one of the scariest things is that there is virtually no way to appeal a wrong or biased decision.
Something else to consider is that if you are the party most likely to cause (rather than incur damages), you may prefer litigation to arbitration because it will be much tougher for a Chinese company to take a Chinese court judgment and enforce it in your home country than to take a Chinese arbitration award to your home country for enforcement.
I am certainly not trying to be comprehensive here, just trying to point out that there can be many situations where litigation might be better for you than arbitration.
The best advice is to determine these things on a case by case basis as there is no one size fits all answer.
August 2nd, 2008 at 3:49 am
Simplified Case Study:
I was engaged to produce packaging for major US consumer goods company. Selected China as country of choice. We produced 40 page document with detailed cad drawings and specifications. Met in Shanghai area at location of several Chinese packaging companies using the assistance of a Chinese agent that I knew. I received quotes and made selection. Samples were requested and inspected in China and stateside - samples went through seven interations to achieve proper color and functionality (We made a couple of alterations with our client on the US side)
Three factories were selected based on quotation, inspection and factory capacity. Yes, we had them sign off on our Cad document, our purchase order (with the usual terms and condition) and on the samples themselves.
I embedded inspectors (who worked for our Chinese agent) into the factory. Our inspectors documented the process and assisted the factory in achieving efficiencies. The inspectors also performed Quality Assurance at different stages of product production using a well established statistical inspection method. (They also performed a final inspection).
Our stateside logistics expert also arranged all transportation thus saving a fortune from the China exporter’s quotation.
End result: Millions of dollars of packaging shipped stateside exceeding our client’s expectation. Later we repeated the process with manufactured tools.
I took these steps because relying on a contract and lawyers alone would have similar odds to any game of chance.