The world’s busiest arbitration venue

China now conducts more arbitrations than any other country. Yet arbitration remains a difficult area with competing forums, confusing legal rulings and a perception that some awards may not be enforced. George W Russell reports

China’s judicial system handled 6,433,585 civil lawsuits in 2009, a rise of 8.41% over the previous year. With so many cases clogging the courts, it is hardly surprising that companies and individuals alike have turned to arbitration as an alternative means of resolving disputes.

One of the driving forces has been a regulation issued in 2009, the Supreme People’s Court Establishing a Sound Conflict and Dispute Resolution Mechanism that Connects Litigation and Non-litigation Several Opinions, that encourages parties in dispute to use arbitration or mediation rather than litigation. The regulation has helped propel China’s arbitration system into the top global spot. “The People’s Republic of China now conducts more arbitrations than any other country and has become one of the most important places for commercial arbitrations in the world,” Terence Tung, a partner at Mayer Brown in Beijing, noted in January.

According to the regulation, agreements reached in the course of arbitration or mediation, after having been confirmed by the court, will have the same force in law as those adjudicated by the people’s courts. “The courts at all levels should guide mediation and arbitration methods in a scientific, fair and rational way as well as act as supervisors and executors of agreements,” Jiang Huiling, vice-director of the Supreme People’s Court judicial reform office, told the official Xinhua news agency at the time.

Foreign-related cases dominate

The PRC Arbitration Law, which dates from 1995, distinguishes clearly between domestic arbitration (for cases involving China-incorporated entities only) and arbitration in cases involving a foreign element. The courts have more extensive powers to review and to refuse enforcement of a domestic arbitral award than a foreign-related arbitral award.

In fact, foreign-related cases account for the majority. “The major cause of arbitration hearings is joint venture disputes between foreign and Chinese parties,” says Ted Howes, a partner at McDermott Will & Emery in New York, who is head of the firm’s Chinese litigation and dispute resolution practice. Lately, he adds, he has dealt with cases concerning breach of import and export contracts, private equity funds, manufacturing, hotel management and malpractice involving accounting firms.

Peter Yuen, a partner with Freshfields Bruckhaus Deringer in Hong Kong, has seen arbitration employed in regulatory and corporate compliance investigations, and banking, IP and professional negligence disputes, but agrees that joint venture cases form the bulk. “The more substantial disputes tend to be joint venture disputes or disputes arising from a mismatch in expectations and understanding between the foreign and local parties,” he says.

But what are the pros and cons of arbitration over other methods of dispute resolution? On the plus side, it can be quicker and cheaper than litigation, with time and costs less likely to run out of control. “The good news for parties who choose to arbitrate is that they have the chance to exercise significantly more control over the factors that may result in excessive expense and delay than they would in court proceedings,” says Justin D’Agostino, a partner with Herbert Smith in Hong Kong. “For example, parties may seek to reach agreement with the other side on an appropriately streamlined procedure for the arbitration, nominate robust tribunal members who will exercise strong control over the proceedings, and adopt a proactive approach to make representations to the tribunal on matters affecting timetable and procedure.”

However, the relatively short timescale typical for an arbitration can also be a downside. “The relatively short procedure is the reason many parties choose arbitration,” says Wang Yadong, a partner at Run Ming Law Office in Beijing. “But at the same time, this may be a risk.”

International lawyers agree. “The time frame for ‘domestic arbitration’, which includes cases involving foreign-invested Chinese companies, is too short to permit the kind of case preparation that foreign companies expect,” says Craig Celniker, co-chair of the international arbitration group at Morrison & Foerster in Tokyo. “The hearing can be scheduled for as little as 15 days after appointment of the tribunal.” he says.

The difficulty of joining a third party to arbitration proceedings can also be a drawback. “An arbitration forum generally does not have the power to force a party that is not a party to the arbitration agreement to take part in the arbitration procedures,” notes Xu Sanqiao, a partner at Jingtian & Gongcheng in Shenzhen. Xing Xiusong of Global Law Office in Beijing, who is also an arbitrator with the China International Economic and Trade Arbitration Commission (CIETAC) and a mediator with the CCPIT/CCOIC Conciliation Centre, believes this is “inconvenient”, and means that some disputes “have to be handled by stages”. And a further problem is that pre-arbitration attachment/preservation is not widely used. “To use pre-arbitration attachment/preservation, you must go through a court. The time lag can be long and it can easily fail,” says Tao Jie, a partner at Haiwen & Partners.

Historical issues

The arbitration system can also present other problems, which often have their roots in the past.

Historically, Chinese parties have generally been reluctant to enter into arbitration, especially if they are the originator of the complaint. At a conference held in July by Beijing’s Xicheng District Court on alternative dispute resolution mechanisms, one legal scholar observed that “without exception, ADR approaches come at the cost of concessions made by the complainant”.

The finality of arbitration also worries Chinese parties. “The main risk is that the arbitral award is final and there is no opportunity to change the outcome,” explains Jim Qiu, a partner at Yao Liang Law Offices in Shanghai. Wang Yadong, executive partner at Run Ming Law Office in Beijing, agrees: “If a party encounters an unfair decision in a substantial matter that is subject to arbitration, there is almost no opportunity for further legal recourse. In comparison with the opportunity of appeal to a higher court in judicial proceedings, this is the greatest risk of using arbitration”.

Foreign parties – which most commonly use CIETAC as the arbitration forum – are more likely to raise concerns about fairness and impartiality. “The CIETAC process has slight variations that can be perceived as advantaging Chinese companies,” says Celniker. “For example, even if the parties have selected a foreign language as the governing language, CIETAC’s rules allow the tribunal to ‘add’ Chinese as a language.”

There is also a perception of corruption. “Issues of corruption turn up with disturbing frequency in commercial arbitration,” says the Dubai-based managing partner of a major law firm with extensive business in China. And foreign lawyers say Chinese arbitrators who have sided with foreign parties in major cases have subsequently been harassed or arrested as recently as 2006.

While many lawyers say the situation has improved, memories can be long. “CIETAC used to have a reputation of corruption and has difficulties in attracting reputable arbitrators,” says Joanna Zhang, an associate in the corporate practice group at Wilmer Cutler Pickering Hale & Dorr in Beijing.

So why do companies agree to arbitration within China at all? One reason, almost certainly, is the cost advantage. “The Chinese system is more cost-efficient than those in Hong Kong or Singapore,” says Chi Shaojie, a CIETAC arbitrator in Beijing.

Secondly, Chinese lawyers may advise their domestic clients to choose local arbitration centres because of familiarity. “We always advise our clients to choose CIETAC, Beijing Arbitration Commission (BAC), Hong Kong International Arbitration Centre (HKIAC), Singapore International Arbitration Centre (SIAC) and the International Chamber of Commerce (ICC) International Court of Arbitration in that order of preference,” says Ma Jie, a partner at Commerce & Finance Law Offices in Beijing. “We prefer CIETAC and BAC because we are more familiar with their procedures and there’s a long list of qualified arbitrators to choose from.”

But CIETAC and the other PRC arbitration centres face stiff competition from abroad. Major international arbitral bodies have expressed interest in working in China: the Paris-based ICC International Court of Arbitration held a road show in China in July to attract more China-related matters. Lawyers, arbitrators and corporate executives attended meetings to promote ICC arbitration in Shanghai, Beijing and Shenzhen. The ICC’s confidence in expanding its China market has been boosted by the recent Ningbo case ruling on enforceability (see below).

Regionally, Hong Kong and Singapore are popular destinations for China-related arbitration. “In my experience, multinational companies have a preference for Hong Kong or Singapore over China because the arbitration laws in both jurisdictions are based on the UNCITRAL Model Law,” says Yu Jin Tay, of counsel at Shearman & Sterling in Singapore, and head of the firm’s international arbitration practice in Asia. “The courts of both jurisdictions are staunchly pro-arbitration in terms of being non-interventionist yet supportive with interim relief and emergency measures when needed.” (For an examination of the major arbitration forums that are competing for business, see page 54.)

The enforcement factor

Doubt over the enforcement of arbitral awards in China remains a major obstacle, and must be taken into account when choosing an international forum such as the ICC. It can also be an issue in domestic arbitration.

According to Zhang Dong, a partner at Dacheng Law Offices in Beijing, “for arbitral rulings to be enforced, it is necessary to apply to a court”. Zhang identifies three major problems afflicting enforcement efforts. First, the party ordered to make a payment may have insufficient assets. Second, the court proceedings can drag on for a long time, and third, the court may display “prejudice” against the idea of enforcing an arbitral award.

Some Chinese lawyers accentuate the positive. “In order to ensure the enforceability of foreign-related arbitral awards, the Chinese courts have established a dedicated examination mechanism,” says Spring Chang, founding partner of Chang Tsi & Partners. “If an intermediate people’s court decides not to enforce a foreign-related arbitral award, it must report this to the higher people’s court or even to the Supreme People’s Court to examine and verify.”

Recently there have also been significant developments affecting the enforcement of awards outside the mainland PRC.

On 30 December 2009, the Supreme People’s Court issued a notice regarding the enforceability of Hong Kong arbitral awards under the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region. This arrangement provided that Hong Kong awards should be, as a rule, enforceable in the Chinese courts. Exceptions under article 7 of the arrangement are largely in line with the standard grounds for refusing enforcement listed in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention).

“The notice has been interpreted as confirming the relatively pro-enforcement stance on the part of the Chinese courts,” Ronnie King of Ashurst noted in an analysis in May. Meanwhile, a recent ruling by the Ningbo Intermediate People’s Court has drawn further attention to questions over the enforceability of foreign awards, including Hong Kong arbitration awards, in China.

The so-called Ningbo case involved an objection by a Chinese respondent to the enforcement of an award rendered in favour of a Swiss claimant by an ICC tribunal seated in China (see China Business Law Journal volume 1 issue 1, page 9). The respondent objected to the enforcement proceedings on the grounds that the ICC was unable validly to render an award in China and that the true intention of the parties was to submit the dispute to CIETAC arbitration.

The Ningbo court rejected the respondent’s challenge to the validity of the award. Its reasoning was that Chinese law requires any challenges to the validity of an arbitration agreement to be made prior to the first arbitration hearing, and in this case the respondent had failed to make such a challenge. Accordingly, the court appeared to approve of the enforcement of the award. “Before this case, it was generally believed that overseas arbitration institutions could not administer arbitrations with a seat in China, or, more precisely, such foreign administered arbitration seated in China would not be recognized by the Chinese courts,” says May Tai, partner in the dispute resolution division of Herbert Smith in Shanghai.

There has been much speculation about whether this decision signals the start of court recognition of arbitrations seated in China but not administered by Chinese arbitration commissions. Judicial decisions do not create binding precedents in China and therefore the ruling by the Ningbo court is not binding on any other courts. “The Supreme People’s Court has issued directions friendlier to international arbitration,” says Robert Pé, head of the Asia litigation practice at Orrick Herrington & Sutcliffe. “But results will be patchy.”

However, Lou Jinbo at the Shenzhen Arbitration Commission notes that “the PRC Arbitration Law doesn’t address the issues on foreign arbitration commissions carrying out arbitration in China. It’s a grey area.”

Enforcement at home

It might be assumed that awards from domestic Chinese bodies would be more easily enforced. The domestic arbitration commissions themselves claim enforcement is not a problem.

According to Yu Jianlong of CIETAC, in the past few years CIETAC has seen “very few foreign and foreign-related arbitral awards which have been judged unenforceable by the courts. Of these, some were because the party ordered to pay did not exist, or had gone bankrupt, or its assets could not be executed. Also some awards are not enforced because the arbitration procedures are not correct, or the arbitration agreement was invalid, or because the parties applied to the court for enforcement after the limitation period expired”.

Chen Cong, a senior official with the BAC, says that most of the arbitral awards rendered by the BAC have been enforced by the courts. “In order to guarantee the enforcement of arbitral awards, the Supreme People’s Court issued a judicial interpretation to order the intermediate courts to enforce awards,” he says. “This will help the parties to get arbitral awards enforced.”

And some lawyers, too, strike an optimistic note. “In our experience, the PRC intermediate courts, to which applications for recognition and enforcement of arbitral awards are made, are generally diligent in considering the application and applying their minds to it,” says Yang Ing Loong, a partner at Sidley Austin in Singapore.

Others say oversight on the enforcement (and investigation into the overturning or cancellation) of awards is much better than 10 years ago. “There is a reporting system,” says Franki Cheung at Deacons. “If the intermediate people’s court in Beijing refuses to enforce an award, it must report this fact to the higher people’s court before giving the judgment to the parties. If the higher people’s court is of the same opinion, it must be reported to the Supreme People’s Court.” Of course, while such a system might seem fairer to aggrieved parties in arbitration, it slows the overall progress. “The downside is it takes more time to go through three courts,” Cheung says.

Indeed, since ratifying the New York Convention, Chinese courts are reported to have refused enforcement of an award based on the contrary to “public policy” ground contained in the convention on only one occasion, according to Cameron Hassall, a partner and head of the Hong Kong and China arbitration practice at Clifford Chance in Hong Kong.

Domestic-foreign divisions blur

Views of the major arbitration centres in China appear less divided along national lines than may have been the case in the past.

Many foreign lawyers still recommend against conducting any arbitration in China. “You want to avoid arbitration inside the mainland,” Howes advises from New York. Celniker in Tokyo echoes this. “China’s law is non-transparent. It must be made more transparent and outcomes must be more predictably based on the merits.”

And some PRC lawyers acknowledge that the low esteem in which China’s legal system is held internationally reflects badly on its arbitration system, despite recent efforts at modernization. “Many multinationals do not choose CIETAC arbitration because they do not trust the PRC legal system as a whole,” says Liu Yulin, a partner at the Zhong Lun Law Firm in Beijing.

Wang Yadong of Run Ming Law Office believes such lack of trust can be justified. “The arbitrators chosen by one side in a domestic arbitration are almost always partial to that party, to the extent of being called their ‘second agent’. This is especially the case if the arbitrator is also a practising lawyer. They can often blur their role in the arbitration.” Wang also notes that choice of location can be important. “Because local arbitration commissions often find it difficult to separate themselves from local governments, generally speaking, where local parties are involved in a transaction, we don’t recommend foreign parties to opt for local arbitration commission in their contracts”.

According to Xing of Global Law Office, Chinese arbitration bodies need to “become more specialized, reduce administrative interference and become genuinely independent”.

But on the whole, Chinese domestic lawyers tend to be broadly supportive of the arbitration system. “I can attest to CIETAC’s ability to effectively resolve domestic as well as complex international disputes,” says Zhan Hao, executive partner at Grandall Legal Group in Beijing. “It provides rules similar to those of many other international arbitral institutions and carefully records qualified domestic and international arbitrators.”

Others are more strident in their defence of China-sited arbitration, saying that the reality is not the same as the perception. “The arbitration procedure is professional, but has been misunderstood by the general public,” says Xu Jiali, executive partner at Longan Law Firm in Beijing, referring to both domestic and foreign-invested companies that have engaged in arbitration without reasonable expectation and full understanding of the consequences.

Some say negative beliefs about China’s legal and arbitration system are out of date. “Due to some traditional opinions about the Chinese judicial system held by other countries, the enforceability for arbitration awards in China is always questioned by foreign parties,” says Qiu.

Xu Sanqiao at Jingtian & Gongcheng agrees that China has moved on. “Critics tend to look at the past, not the present,” he says. “Given our previous experience of representing foreign parties in enforcing arbitral awards, we are fully confident of the enforceability of arbitral awards in China.”

The China-based arbitration centres, for the most part, reject international criticism of their procedures, impartiality and enforcement efficacy. “Blame is always heard more than praise,” says Chen Cong, from the BAC, who adds that critics of his commission are in the minority. “When awards are well enforced, people would seldom speak about it since they just take it for granted.”

Nevertheless, lawyers have urged China’s government to pass better legislation to improve the arbitration climate. “The key lies in the national legislature to pass legislation to improve the independence of national arbitration institutions and improve transparency and efficiency in the implementation phase,” says Donna Li, a partner at Allbright Law Offices in Shanghai.

In Hong Kong, lawyers are generally supportive of mainland arbitration despite the presence of the HKIAC as an alternative venue. “There have been some good quality awards from CIETAC; they really spend time on them,” says KK Cheung, a partner at Deacons in Hong Kong. “If there’s a complex aspect, the chairman of CIETAC will appoint an expert or even a panel of experts to give advice on a point of law.”

Lawyers have noticed that as China arbitration centres institute reforms, their costs rise. “There have been delays in adversarial arbitration proceedings, and arbitration costs and expenses seem to have escalated,” says Tao Jie of Haiwen & Partners in Beijing. “It’s an increasing trend. Enterprises might consider mediation before arbitration in order to resolve lesser controversies.”

Arbitrators themselves are confident about Chinese arbitration’s ability to deliver a reasonable result – at least in contrast to their judicial counterparts. “Frankly speaking, arbitration is much more trustworthy than judicial jurisdiction in China nowadays due to its truly independent and impartial high professional standard,” says Chi, who adds that disappointing arbitration results are often due to incompetence by lawyers who nominate inappropriate or inexperienced arbitrators.

Choosing the right arbitrator is a key matter, law firms say. James Rowland, an adviser in King & Wood’s international litigation and arbitration practice, offers a checklist for selecting an arbitrator: “Does the arbitrator have a reputation as someone who is energetic and works hard? The volume of submissions filed in arbitrations can be overwhelming. Is the arbitrator among the very well-known and reputable arbitrators? If so, it may often be difficult to schedule hearings with him or her at times that are convenient. In certain fields, even the best arbitrators might not have as good knowledge and experience as ordinary judges who handle a high volume of cases.”

Clients can sometimes be to blame for appointing substandard arbitrators. CIETAC and other major arbitration centres offer panels of hundreds of arbitrators from the mainland of China, Hong Kong and elsewhere. Normally, each party nominates one arbitrator and agreement is reached on the third, who serves as chairman of the arbitration panel. “It would be of help to mitigate the danger if the clients could pay more attention to selection of an arbitrator who is a real professional in the area of dispute,” says Tao Xiuming, a partner at JunZeJun Law Offices in Beijing.

Some suggest China’s arbitration is negatively viewed as a result of poor marketing efforts. “Chinese arbitration organizations should improve their image,” says Zhang Dong at Dacheng Law Offices. “It is necessary to increase the intensity of external publicity and promotion to make the world more understanding of and give more recognition to China’s arbitration system.”

Others suggest the appointment of more foreign arbitrators to give the panels a more authoritative reputation. “Chinese arbitration organizations should be more international and bringing in more foreign arbitrators,” says Frank Liu, head of the dispute resolution department at Chang Tsi & Partners in Shanghai. Liu agrees that better publicity is needed “so that more people understand China’s national arbitration institutions”.

“CIETAC should make more effort in terms of independence and transparency,” says Xu of Jingtian & Gongcheng. And Wang at Run Ming believes that “CIETAC and others would benefit from adopting well known international rules as a confidence building gesture, rather than trying to make their own rules”.

Work in progress

While arbitration in China has its drawbacks, many lawyers suggest a couple of easily achievable improvements to enhance its international status. “One, reduce administrative intervention to achieve real independence and, two, improve the remuneration of the arbitrators,” says Xing at Global Law Office. “It requires more professionals to put in more effort to improve the status of arbitration in China.”

Some international lawyers see Chinese arbitration as a work in progress. “The mainland is definitely better than it was, especially since the 2005 changes to the arbitration rules involving party autonomy,” says Pé. “Parties are able to specify that a chairman must not be a PRC national, that arbitration is handled in a particular way with regard to cross-examination or discovery, and that arbitrators cannot turn into mediators and then revert back into arbitrators.”

Pé adds that the net result of recent changes has been an improved environment for non-Chinese parties: “All of these changes are geared to foreign investors.” CIETAC concurs with this sentiment. “CIETAC is very willing to work with domestic and foreign colleagues and parties together to explore effective means of dispute resolution and arbitration in China and jointly promote the development and progress of arbitration throughout the world,” says Yu.