Prevention of ‘sham arbitration’

Sham arbitration is an action in which a party concerned initiates arbitration and deludes the arbitration tribunal to make an erroneous award by malicious collusion, fabrication of information, falsification of evidence, fictitious legal relationship, and other improper means to seek illegitimate property rights and interests, and thus causes damages to the public interests or property interests of a third party.

Sham arbitration may be identified based on the following four principles. First, the sham arbitration is filed for improper and illegitimate purpose. The party concerned initiates sham arbitration in order to seek illegitimate interests or infringe on related legitimate rights and interests, primarily the interests of third persons and public interests. Prior cases show that, the party concerned with sham arbitration utilizes the arbitration procedure and applies to the arbitration tribunal for confirmation or change of legal relationship, with the purpose of lawfully creating a legal relationship that does not exist or changing or eliminating the existing legal relationship.

Second, in sham arbitration, the party concerned utilizes the confidentiality and privity of the arbitration to cover up its illegal acts. As a result, the arbitration tribunal would make an erroneous award. As the privity of contract is strictly exercised in the arbitration system, it is difficult for a person not involved to participate in the arbitration activity. Thus, it is difficult for him/her to protect his/her legitimate rights and interests by participating in the arbitration procedure. In addition, confidentiality of arbitration eliminates the possibility that a person not involved can be aware of the existence of sham arbitration. Meanwhile, the evidence and opinions reviewed by the arbitration tribunal are limited to the facts compiled by the parties to a dispute. Even through Article 43 of the Arbitration Law stipulates the right of the arbitration tribunal to fact-finding and evidence collection, in practice, the arbitration tribunal, confined by the civil evidence rule that the burden of proof is borne by the claimant, and difficulties in taking of evidence in arbitration, generally has limited capacity in fact-finding for a case.