“In the event of a dispute arising out of the contract, parties should discuss on a friendly basis with a view to settling the dispute amicably. If the dispute cannot be resolved through friendly discussions, any party may refer the dispute to arbitration.” This type of clause is quite often seen in PRC contracts.
If a company wishes to resolve any potential dispute in relation to a contract by way of arbitration, careful consideration should be given to the drafting of the arbitration clause before the contract is signed.
Arbitration institution
In China, arbitration proceedings are administered by arbitration institutions. Perhaps the best-known institution for foreign-related arbitration is the China International Economic and Trade Arbitration Commission (CIETAC). If an arbitration clause fails clearly to designate an appropriate arbitration institution, it may be held to be invalid.
In August 2006, the Supreme People’s Court promulgated the Several Issues Concerning the Application of the PRC Arbitration Law Interpretation, which took effect on 8 September 2006. According to article 3 of the interpretation, if the name of the arbitration institution specified in an arbitration clause is inaccurate but the specific arbitration institution can be determined, the selection of the arbitration institution will be held to have been made. Further, article 6 provides that if an arbitration clause specifies that arbitration shall be brought before the arbitration institution of a certain place and such place has only one arbitration institution, such arbitration institution shall be deemed the specified arbitration institution.
Let us take CIETAC as an example. CIETAC is based in Beijing and currently has a South China sub-commission in Shenzhen, a Shanghai sub-commission in Shanghai, a South West China sub-commission in Chongqing and a Financial Arbitration Centre in Tianjin. Parties can expressly agree to refer the dispute under a contract to CIETAC generally, or to either of its sub-commissions. However, it is recommended that parties should specify the headquarters or the desired sub-commission for the purpose of certainty and convenience. A mere reference to, for example, “arbitration in Beijing” is not sufficient to designate CIETAC, as there is more than one arbitration institution in Beijing. And a reference to “CIETAC in Guangzhou” will also fail, as CIETAC has no sub-commission in that city.
If arbitration in China is contemplated, considerations that should be taken into account in deciding the place and the arbitration institution should not be limited to the capability and reputation of the arbitration institution and the location of the parties. If enforcement proceedings may be necessary in Hong Kong, the parties should ensure that the intended arbitration institution is on the list of recognized mainland arbitral authorities gazetted by the Hong Kong government. This is a prerequisite for an arbitral award made in China to be directly enforceable in Hong Kong, pursuant to the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region signed on 21 June 1999, and the Arbitration Ordinance (Cap 341 of the Laws of Hong Kong).
Succinct or comprehensive?
The model arbitration clause recommended by CIETAC, and available in Chinese and English at www.cietac.org, is short and succinct. Depending on circumstances, such as the nature of the transaction, nationality of the parties to a contract, language of the evidence and witnesses, intention of the parties and bargaining power of the parties, it may be appropriate to include additional terms in the arbitration clause.
Applicable law
It is sometimes argued by the parties in dispute that a general choice of law clause only applies to the substantive issues of a contract and does not apply to procedural issues of an arbitration in China. For the avoidance of doubt, it is prudent to expressly specify the law governing the procedural issues of the arbitration in the contract (including the determination of the validity of the arbitration clause).
Language
Parties to a contract may agree upon the language that should be used in an arbitration arising out of the contract. In the absence of such agreement, Chinese will be the official language to be used in arbitration proceedings conducted in China. This may be prejudicial to a client who is not conversant with the Chinese language. Additional costs of translation and interpretation may also be incurred in this way.
Number of arbitrators
Internationally, arbitral tribunals normally consist of either one or three arbitrators. In China, the arbitral tribunal will be composed of three arbitrators unless otherwise agreed by the parties. The number of arbitrators has a direct impact on the costs to be incurred by the parties in arbitration. Therefore, the parties may agree the number of arbitrators to be appointed to resolve the dispute arising out of their contract in the light of their particular requirements and any special features of the contract.
Nationality
As a matter of independence, there are situations in which the parties would like to restrict the nationality of one or more arbitrators that may be appointed in the arbitration. This issue can also be dealt with during the drafting of the arbitration clause. However, it should be noted that in arbitrations conducted in China, arbitrators must be appointed from the panel of arbitrators of the designated arbitration institution, unless otherwise agreed by the parties and confirmed by the chairman of the institution. It is recommended that the parties ensure that any nationality restriction imposed by the parties is feasible in view of the composition of the panel of arbitrators of the intended arbitration institution.
Costs
Before accepting an application for arbitration, arbitration institutions in China require the parties to pay arbitration fees according to their scale fee schedule. The fees paid will be used to remunerate the arbitrators. The parties will also incur other costs and expenses in taking part in the arbitration, such as lawyers’ fees, travel expenses and witnesses’ costs. However, there are no provisions governing the allocation or taxation of such costs and expenses in China. In practice, the arbitral tribunals will usually order the unsuccessful party to pay the arbitration fees. However, the allocation and taxation of other costs and expenses is at the discretion of the arbitral tribunals. As such, parties may include express provisions in their contract to provide certainty.
Negotiation
Arbitration is an efficient and flexible means of alternative dispute resolution. Parties are generally free to agree in advance in their contracts on various aspects of the basis of the arbitration, according to their situation and requirements. In drafting a proper arbitration clause, the issues mentioned above should be taken into account, as well as any other special features of the case.
KK Cheung is a partner at Deacons in Hong Kong. He specializes in dispute resolution, construction and foreign investment. For enquiries relating to dispute resolution, please contact him on +852 2825 9427 or by email at kwokkit.cheung@deacons.com.hk
