For international General Counsels entering the Chinese market, selecting “Arbitration” (often CIETAC or HKIAC) is almost a reflex. The traditional logic is sound: avoid local protectionism and ensure global enforceability via the New York Convention.
However, a rigid adherence to this “arbitration-only” playbook can be a strategic error.
Arbitration is strictly a creature of contract—it binds only the signatories. But in the real world, fraud and commercial disputes often spill beyond the four corners of a written agreement. In specific high-stakes scenarios, the People’s Court (PRC Court) possesses statutory powers and procedural reach that no private tribunal can match.
Below are four commercial scenarios where opting for Chinese litigation is not just a viable alternative, but the superior strategic play.
- The “Vanishing Debtor”: Targeting Shareholders Directly
The Scenario: You sign a supply contract with a Chinese Limited Liability Company (LLC). They default on a significant payment. Upon investigation, you discover the LLC is a “shell company”—stripped of assets—while the actual controlling shareholder has been siphoning off funds or never fulfilled their capital contribution obligations.
Why Arbitration Fails: Arbitration is limited by the doctrine of privity. Your arbitration clause is signed by the Chinese LLC, not its shareholder. Unless the shareholder explicitly signed in their personal capacity (a rarity), an arbitrator has zero jurisdiction over them. You simply cannot drag a third-party shareholder into arbitration to pay the company’s debts.
The Litigation Advantage: Litigation allows you to strike at the root of the problem: Piercing the Corporate Veil.
Under Article 20 of China’s Company Law, creditors can sue shareholders directly if they have abused the company’s independent status (e.g., commingling personal and company funds) to evade debts. Furthermore, if a company is dissolved without proper liquidation, courts can hold shareholders liable. A Chinese judge has the statutory authority to look past the empty shell and issue a judgment directly against the wealthy shareholder’s personal assets—a power virtually inaccessible in standard commercial arbitration.
- Breaking the Stalemate: Combating Bad Faith Obstruction
The Scenario: You are facing a counterparty whose primary defense strategy is “delay and deny.” They refuse to hand over critical evidence, ignore procedural deadlines, and attempt to run down the clock to exhaust your legal budget.
Why Arbitration Fails: Arbitrators are, fundamentally, private service providers. While they strive for efficiency, they often tread carefully to avoid grounds for the award being set aside later due to “procedural unfairness.” Consequently, tribunals may grant repeated extensions or hesitate to sanction a recalcitrant party. They lack the “hard power” to force compliance.
The Litigation Advantage: The court represents the state apparatus. Chinese judges have immediate access to coercive measures. Under the Civil Procedure Law, courts can impose fines, detention, or search warrants against parties who conceal evidence or obstruct proceedings. When facing a “rogue” counterparty, the immediate threat of state-backed sanctions forces compliance far faster than the polite requests of a tribunal.
- The Efficiency Play: High-Volume Debt Recovery
The Scenario: The case is factually boring. The goods were delivered, the invoice was accepted, and the payment is overdue simply because the buyer is short on cash. There is no complex legal dispute.
Why Arbitration Fails: Arbitration is a premium service designed for complex commercial battles. Utilizing a three-member tribunal to collect a straightforward debt is akin to hiring a neurosurgeon to treat a headache. The administrative fees and arbitrator rates are disproportionately high compared to the simplicity of the claim.
The Litigation Advantage: For indisputable debts, Chinese litigation offers a “fast lane” for ROI (Return on Investment):
Summary Procedure (简易程序): For clear facts, a single judge can hear the case with halved filing fees and a shortened timeline (statutorily concluded within 3 months).
Payment Order (支付令): For pure monetary claims, you can bypass the trial entirely. The court issues a demand; if the debtor doesn’t object within 15 days, it becomes an enforceable title immediately.
- Broadcasting the Rules: The Deterrence Effect
The Scenario: You manage a network of distributors or franchisees in China. One partner violates a core compliance term (e.g., price fixing or IP misuse). You don’t just want compensation; you want to send a warning signal to your entire network to prevent future breaches.
Why Arbitration Fails: Arbitration is famous for its confidentiality. While this protects trade secrets, it also hides your victories. A win against Distributor A remains a secret, leaving the other 50 distributors unaware that you are willing and able to enforce your rights. It creates no binding legal precedent and no public deterrent.
The Litigation Advantage: Publicity is a tool. A court judgment is a matter of public record. By securing a favorable verdict in the People’s Court, you create a tangible “case study” that can be circulated to other partners. It establishes a market precedent and signals to your entire supply chain that violations will be prosecuted successfully.
Conclusion: Choose the Battlefield, Not Just the Clause
Arbitration remains a powerful tool, particularly for protecting trade secrets or navigating highly technical industries (like construction or energy). However, it should not be the automatic default.
When your risks involve shareholder misconduct, bad-faith delay tactics, simple debt recovery, or the need for public deterrence, the Chinese court system offers distinct tactical advantages. The smartest dispute resolution clause is not the one that avoids court—it’s the one that gives you the best leverage to win.
Frequently Asked Questions (FAQ)
Q: Is litigation cheaper than arbitration in China? A: Generally, yes. Chinese court fees are calculated on a progressive scale based on the claim amount and are typically lower than the administration fees plus arbitrator fees charged by major institutions like CIETAC or HKIAC. Furthermore, for simple cases, the “Summary Procedure” halves the court costs.
Q: Can I sue a shareholder for a company’s debt in China? A: Yes, but only under specific circumstances. This is known as “Piercing the Corporate Veil.” If you can prove the shareholder abused the company’s independent status (e.g., mixed personal and company money) to evade debts, a Chinese court can hold them personally liable. This is much harder to achieve in arbitration due to jurisdictional limits.
Q: What is a Payment Order (支付令) in China? A: A Payment Order is a fast-track debt collection procedure used in Chinese courts. If a creditor has clear evidence of a debt and no other disputes with the debtor, the court issues an order requiring payment within 15 days. If the debtor does not object in writing, the order becomes enforceable without a trial.
Q: Why choose litigation over arbitration for IP disputes? A: While arbitration offers expertise, litigation offers immediate interim relief (injunctions) and public deterrence. China has established specialized IP Courts in major cities (Beijing, Shanghai, Guangzhou) with judges who are highly experienced in patent and trademark law, making the court system a strong option for enforcing IP rights.