[Q&A] Litigation or Arbitration? How to Resolve Commercial Contract Disputes? (Part 2)

2024. 4. 18

As a corporate law firm, we are used to answering many questions from our clients about their business in China. In this series of Q&A articles, we will discuss some of the topics that our clients have shown interest in.

Question: Litigation or Arbitration? How to resolve commercial contract disputes?

Answer: In our previous article, “Litigation or Arbitration? How to Resolve Commercial Contract Disputes? (Part 1)”, we explored the circumstances under which arbitration is favored as a dispute resolution method in commercial contracts. Now, we turn our attention to litigation - a more well-known dispute resolution method. While arbitration offers confidentiality and flexibility, litigation has its own unique benefits. Drawing from our experience in legal practice and understanding of commercial contract disputes and litigation procedures, we have identified key scenarios where litigation should be the preferred method of dispute resolution.

When Litigation is the Preferred Choice:

1.Contracts Involving Third-Party Entities: The current “Arbitration Law of the People’s Republic of China” does not explicitly allow for the inclusion of third parties in arbitration procedures. Judicial practice has shown that courts generally disapprove of adding third parties to arbitration procedures. For instance, the Lianyungang Intermediate People’s Court of Jiangsu Province ruled in 2017 that the arbitration tribunal can only adjudicate the rights and obligations between the parties to the arbitration agreement, not those of other individuals. Therefore, for contracts involving third-party rights and obligations, court jurisdiction may be more conducive to the inclusion of third parties and the reasonable resolution of disputes.

2.Preference to Avoid Final Award Based on Only One Hearing: Arbitration is final, leaving parties with no right to appeal or retry an arbitration award they disagree with. They also cannot sue in court for the same dispute. If parties disagree with the arbitration result, their only recourse is to apply to the court for the revocation of the arbitration award. In contrast, court litigation implements a two-instance system, allowing parties to appeal to a higher court if they disagree with the judgment. Therefore, when signing a contract, parties should consider their preference for a fast, final arbitration procedure or a litigation procedure with a more comprehensive error correction relief mechanism.

3.Disputes Involving Low-Value Property: For cases involving small-value dispute subjects, litigation, compared to arbitration, can be a more cost-effective dispute resolution method. However, for high-value subjects, the costs should be assessed based on the specific situation.

We hope this article helps with clarifying when litigation should be the preferred method of dispute resolution in commercial contracts.