The following article by Mario Herman provides an overview of how arbitration can be used for dispute resolution in China. A recent arbitration award in favor of a US licensor which was confirmed by a Chinese court should be considered good news for US franchisors.
Arbitration in Dispute Resolution in China is Good for Franchisors
By Mario Herman, Esq.
As in the U.S., arbitration is endorsed under Chinese law for resolving commercial disputes. On August 31, 1994 the Arbitration Act of the People's Republic of China (the Act") was enacted by the National People's Congress. Applying to both domestic and international arbitration, it became effective in September of 1995. Also like in the U.S., the basis for arbitration under the Act is a valid arbitration agreement. Under the Act, an arbitral award is final and binding on both parties and can be enforced by the courts. Where a valid arbitration agreement exists, a court is required to refer the parties to arbitration. Although the court may, on the request of the parties, rule on the effect of the arbitration agreement, and offer property preservative measures and interim measures of protection of evidence. An arbitral award is appealable to the courts, but the courts may only refuse enforcement thereof in accordance with the grounds for refusal set forth in the Act or the Convention which the PRC has acceded to.
Arbitration seems to be becoming a favored method of dispute resolution in business relationships in China, both domestically and internationally. In a recent dispute between a licensor of clothing, sportswear and furnishings, regarding trademark issues, after an arbitration hearing before the U.S. based International Centre for Dispute Resolution (ICDR), the claimant licensor obtained an award against a Chinese licensee. After the arbitration hearing, the arbitrator entered an award in favor of the claimant licensor confirming the termination of the license, finding that the licensee materially breached the license agreement, enjoining the licensee's activities in China, and dismissing the licensee's counterclaim. The award in the amount of $1.7 million (damages, attorney's fees and costs), and a permanent injunction (including an order to return or destroy all remaining inventory) was confirmed by the Shanghai Intermediate Court No. 1, and was transferred to the Shanghai Changning District People's Court for additional proceedings to locate the assets of the respondent. The respondent voluntarily paid the monetary award and destroyed the remaining inventory. The claimant's Chinese counsel is quoted as saying: "We recommend to our clients to use arbitration if they have disputes, an arbitration award can more easily be enforced in China." (See, "Chinese Courts Confirm U.S. Arbitration Award," Managing Trade Marks, August 4, 2011 http://www.managingip.com, and "Enforcement Success for Designer Brand in China," Global Arbitration Review, August 17, 2011,
Mr. Herman based in Washington, D.C., represents franchisees domestically and internationally in negotiation, mediation, arbitration, and litigation.