New rules governing arbitration in China, Hong Kong, Singapore and at the International Chamber of Commerce have changed the game. Which rules are right for you?
By Colin Galloway
Asia’s major arbitration forums have recently entered something of an arbitral beauty pageant. As they update their rulebooks to reflect the latest international practice and broaden the scope of services and remedies they offer, centres, chambers and commissions are jockeying for the new business looming over the horizon.
The Singapore International Arbitration Centre (SIAC) Rules were amended in July last year. In Hong Kong, a new Arbitration Ordinance came into force this June; the UNCITRAL Model Law, on which Hong Kong’s Arbitration Ordinance is based, was revised in August 2010. Meanwhile, the China International Economic and Trade Arbitration Commission (CIETAC) and the International Chamber of Commerce (ICC) are expected to introduce amended arbitration rules in late 2011 and early 2012 respectively. All these recent or impending changes have left many practitioners pondering which regime to opt for when drafting China-related dispute resolution clauses.
In numerical terms, arbitrations seated in China are by far the most common. According to CIETAC secretary general Yu Jianlong, CIETAC handled 1,352 cases in 2010, the largest caseload of any arbitral institution worldwide. Some other domestic tribunals also enjoseey good reputations and are seeing rapid growth in case traffic. These include the Shanghai Arbitration Commission (SAC) and the Beijing Arbitration Commission (BAC).
In some situations, there are obvious advantages to arbitrating in China. Shen Honghao, vice director of development at SAC, says that “compared to foreign arbitration institutions, SAC has a geographical and cultural advantage”. According to Chen Cong, a director of the BAC secretariat, “if Chinese law is to be applied in deciding the case, domestic arbitration institutions can provide better access to lawyers familiar with Chinese law”.
Most Chinese businesses prefer to arbitrate using a China-based body rather than going abroad. As James Kwan, a partner at Baker & McKenzie in Hong Kong, says, lawyers “would usually choose CIETAC if acting for the Chinese party because there are advantages to arbitrating in your own jurisdiction”.
But foreign businesspeople are generally less positive about China-seated tribunals. A 2010 survey comparing the merits of popular international arbitration centres, conducted by the School of International Arbitration at Queen Mary, University of London, found tribunals in Moscow and China were the most negatively viewed in a poll of more than 100 corporate counsel at multinational companies. This perception may explain why the number of foreign-related arbitrations accepted by CIETAC fell from its peak of 902 in 1995 to 418 in 2010, as various (mainly Asian-based) alternative international arbitration institutions have emerged. Shen admits: “When it comes to international arbitration, the trust and reputation the SAC has gained still cannot compare with those of foreign arbitration institutions.”
The PRC Arbitration Law allows for foreign-seated arbitration where “foreign-related” parties are involved, but does not elaborate on this concept. However, under a Supreme People’s Court opinion from 1992, “foreign-related” is defined to include cases where at least one of the parties is a foreign entity or where the contract in question establishes “obligations” outside the PRC. Because both wholly foreign owned enterprises and Chinese joint ventures are Chinese legal entities, they will usually have no option but to arbitrate domestically when dealing with a Chinese counterparty. There may, however, be ways to avoid this. According to Kwan, “sometimes clients create a foreign element by introducing a third party subsidiary outside China into the agreement – they pay the Chinese entity or there are other obligations to perform”.
Questions over neutrality of China-seated arbitration persist. As one lawyer comments: “I think there is still a consensus, among foreign lawyers anyway, that a Chinese court or arbitrator will have a certain level of bias towards Chinese companies.”
Concerns over impartiality are exacerbated by the mandatory fee scales imposed by Chinese arbitration commissions. Because these are significantly lower than those offered by foreign panels, experienced arbitrators are sometimes reluctant to sit in Chinese arbitrations. This has led to the unwelcome phenomenon of foreign arbitrators being paid substantially more than their Chinese peers sitting on the same panel. According to Robert Pé, a Hong Kong-based partner at Orrick Herrington & Sutcliffe, “the fact that CIETAC allows foreign arbitrators to be appointed is very helpful. Having said that, foreigners appointed under the CIETAC scale get paid a lot more than locals, so that’s not ideal from the perspective of ensuring the tribunal members function well together”.
Enforcing foreign-related awards
Other concerns are more technical. In the 1990s, the Supreme People’s Court adopted a system requiring any intermediate court that intended to refuse to enforce a foreign award (pursuant to an application under the New York Convention), or a foreign-related award, to report to its superior court and ultimately to the supreme court itself for a final decision.
By and large, the measures taken by the Supreme People’s Court have been effective in curtailing malpractice. But while official statistics relating to court referrals of enforcement actions to the Supreme People’s Court exist, they are not made public. This has created a level of angst among foreign lawyers. As Christopher To, a Hong Kong-based arbitrator and former secretary general of the Hong Kong International Arbitration Centre (HKIAC) says: “The system is in place, but records of actual enforcement are not shown. By having data available and visible [they] could create the positive image that the judiciary is following international norms in relation to enforcement”.
That said, Kwan reports that Supreme People’s Court officials have indicated informally that “in 80% of cases where both the intermediate people’s court and higher people’s court contemplated refusing to enforce a foreign award, [they] were finally overturned by the Supreme People’s Court in favour of enforcement”. This has meant that fewer than 20 foreign awards since 1995 have been denied enforcement by Chinese courts.
That doesn’t mean there are never problems. According to Vincent Mu, an associate at Martin Hu & Partners in Shanghai, “generally Chinese courts differ in their criteria for enforcing foreign arbitral awards, and hence give people the impression that Chinese courts do not enforce effectively”. May Tai, a partner at Herbert Smith in Hong Kong, observes that “there is still a lack of experience and understanding of arbitration on the part of some local courts, particularly outside first tier cities, which sometimes see their role as being to assert their own jurisdiction against that of arbitral tribunals and to protect the interests of Chinese parties, leading to difficulties and delays in the enforcement process”.
Controversy can also arise even if a court rules to enforce a foreign-related award. The Ningbo case, reported in issue 1 of China Business Law Journal, was the first time that a Chinese court ruled to enforce an arbitration award made in China by a foreign arbitration body. The court applied the second limb of article I(1) of the New York Convention. However, there remains controversy over whether the Ningbo court’s decision was clear or correct. Some Chinese lawyers believe otherwise.
According to Niu Lei, a partner at Zhong Lun Law Firm, “under current Chinese law, foreign arbitration bodies such as the ICC are not permitted to conduct arbitration within China”. Niu lists a number of reasons to question the ruling. First, neither the PRC Civil Litigation Law nor the PRC Arbitration Law state that foreign arbitration bodies may conduct arbitration in China, nor how this may be done, and the ICC is not a body constituted in accordance with the PRC Arbitration Law. Second, with regard to the New York Convention, China only recognizes and enforces arbitral awards made in the territory of signatories to the convention outside China; it does not recognize or enforce non-domestic arbitral awards. Finally, in ruling that this was a non-domestic arbitral award, the Ningbo court acted beyond its power, as only the legislative organs of the state have the authority to do this.
All over again
Enforcement of domestic arbitration awards is beset by different problems. PRC courts are more likely to overturn awards made by domestic arbitration bodies than those from foreign bodies.
According to Arthur Ma, a lawyer at Fangda Partners in Beijing: “Under the Civil Procedure Law, parties not satisfied with domestic arbitration awards can ‘invite’ the court to revisit the merits of the case. In practice, the party against whom enforcement is sought often tries to do this. The court normally accepts the application and goes back to look at the merits – so basically you’re doing it all over again.”
This discrepancy between the enforcement regimes for domestic and foreign-related arbitrations has led to calls for reform. According to Zheng Xilin, a partner at Grandall Legal Group in Beijing, the criteria for refusing enforcement in domestic arbitration “involves review of both procedure and fact”, while those in foreign-related arbitration require review of procedure only; there seems to be no reason for this distinction and it has been recommended that the criteria for both be changed to a review of procedure only. Although this has been mooted by some to be included as part of forthcoming reforms to the PRC Civil Procedure Law, the prospects for such a change currently seem remote.
Another distinction between the conduct of foreign and Chinese arbitrations is that domestic tribunals tend to be very “hands on”. Arbitration commissions assume an active role in case management, control the appointment of presiding arbitrators, and review and approve tribunal awards. In addition, tribunals will often try to push parties to reach a settlement irrespective of the issues raised by the case. As Phillip Georgiou, a partner at Jones Day in Hong Kong, observes, “arbitrators are always trying to see how they can get the parties to cut a deal.”
To some extent, these concerns may simply reflect natural antipathy felt by common law lawyers towards civil law systems. “As a common law lawyer who works primarily in arbitration, that’s difficult to adapt to”, Georgiou continues. “But when I speak to my colleagues who are mainland Chinese arbitration lawyers, they see it as beneficial. Why argue over legalities and facts when you should be trying to come to some sort of resolution?” Still, Chinese arbitration institutions are considered interventionist even compared to those in other civil law jurisdictions. According to Kim Rooney, a Hong Kong-based barrister and chair of the Hong Kong ICC arbitration committee, “my impression is that their secretariat equivalent is – or has been – engaged at more stages of the arbitral process than even the ICC”.
A further concern sometimes raised by foreign lawyers centres on the rules of evidence used in CIETAC arbitrations. Unsurprisingly, CIETAC’s approach to evidentiary issues reflects that adopted by Chinese courts, which do not require mandatory disclosure of evidence. Does this mean parties get more meaningful disclosure in foreign forums? “Undoubtedly, because I don’t think a CIETAC arbitrator would be likely to order the disclosure of any documents”, says Peter Caldwell, a Hong Kong-based arbitrator and former secretary general of the HKIAC. “I’ve sat five times as a CIETAC arbitrator and no request was made for disclosure in any of these, mainly because the parties knew they wouldn’t be expected to get it.”
This can lead to problems for the unwary because it is common practice for parties in Chinese arbitrations or litigation either to submit evidence very late or to suppress unfavourable evidence altogether. At the same time, both court and arbitration procedure tends to give more weight to documentary evidence than it does to other types of evidence (such as witness statements).
In theory, this issue could be addressed when parties negotiate their arbitration clauses by specifying the adoption of a common law discovery process. In practice, however, this may not work. According to Melody Wang, a lawyer with Fangda Partners in Beijing: “Generally, we don’t recommend that clients do this. CIETAC currently does not welcome the substitution of another institution’s rules and also some foreign rules provide for mechanisms that cannot be implemented in China.” Peter Chow, a partner at Bryan Cave, agrees: “I would not recommend discovery akin to that in a common law court because it is too extensive. I would recommend a clause providing for limited discovery such as that suggested in the International Bar Association rules.”
The perceived shortcomings of the Chinese arbitral framework have raised hopes that expected reforms to the CIETAC Arbitration Rules will bring China more into line with international norms. This may not, however, be the case (see box). Discomfort with the status quo has cast a spotlight on recent or impending reforms to rules at the other three major arbitration regimes in Asia: the ICC, the HKIAC and the SIAC.
Revisions to CIETAC rules coming soon
The current CIETAC rules have been in effect since 2005. Revisions currently underway are expected come into effect next month. However, lawyers say the proposed changes don’t amount to much, largely because the PRC Arbitration Law itself is due to be amended. Proposed changes include the following:
Appointment of arbitrators
The new rules will allow parties more power to nominate arbitrators, and especially the presiding arbitrator (who to date has been appointed by CIETAC itself). In addition, a key change being proposed is to do away with the requirement that arbitrators must be on CIETAC’s panel. Currently, parties are allowed to choose arbitrators who are not on the panel, but this can only be done by agreement between both parties. Most arbitration clauses do not provide for this.
Place of arbitration
CIETAC is adopting a new (for China) concept involving the place of arbitration, which appears equivalent to the internationally accepted notion of the arbitration seat. To date, the nationality of an arbitral award has been determined by the nationality of the arbitration commission by which it is issued. The concept of place of arbitration is important because it will dictate issues such as which laws should be applied in the proceedings, the nationality of the arbitral award, and the basis for enforcement.
Currently, interim relief in Chinese arbitrations is available only upon application through the local court system, and can be difficult to secure. Proposed changes appear to allow greater scope for pre-action relief and (although the wording remains vague) potentially also for tribunals to make interim orders that are enforceable as of right in Chinese courts.
Use of foreign arbitral rules in a CIETAC arbitration
Article 4 of the existing CIETAC rules allows parties to agree to adopt procedures of foreign arbitration institutions in CIETAC arbitrations. However, article 4 is obscurely worded, and there has been confusion as to which outside rules may be adopted and which may not. Revisions have therefore been proposed which would allow parties to arbitrate in CIETAC in accordance with outside rules.
Arb-med is already common in China. However, there are some changes proposed. Parties will be allowed to choose to conduct mediation after an arbitration commences using a party other than the CIETAC tribunal. They may also enter into mediation before arbitration proceedings commence. Any settlement may then be converted into a consent order enforceable in China or internationally.
Higher threshold for summary procedures
The existing rules provide for a “summary procedure” to be used in cases involving less than RMB500,000, or over RMB500,000 if both parties agree. Cases are decided by a single arbitrator selected by CIETAC, with awards to be given within three months. The revised rules raise the threshold for such cases from RMB500,000 to RMB2 million.
In many ways, these reforms incorporate new techniques and practices that differ little from forum to forum and aim to bring Asian arbitration standards into line with international best practice. According to Rooney at the ICC’s office in Hong Kong, “I think there’s a convergence going on – if you look at the rules of various institutions in Asia and around the world say 10 to 15 years ago and now you’ll see that. The ICC rules have been influential in bringing this about.”
One of these reforms has introduced a hybrid style of dispute resolution known as arbitration-mediation (or arb-med), whereby an arbitrator may, with the parties’ consent, change hats after an arbitration has commenced in order to act as a mediator. If a settlement is not reached, he can then resume acting as arbitrator.
Arb-med is now available at all the major Asian arbitration forums, and has proved especially effective in China. Referring to a recent speech given by CIETAC secretary general Yu, Timothy Hill, a Hong Kong-based partner with Hogan Lovells, said, “Mr Yu defended the practice of combining arbitration and mediation, [saying] that the use of arb-med is highly effective in practice and that 20%-30% of CIETAC cases are settled by this method”. The practice is also widely used in PRC courts.
As Peter Murray, a partner in the Shanghai office of shipping-focused law firm Ince & Co, says: “In China, mediation seems to be used more frequently than anywhere else in the world. Quite often in the maritime court system, the judge will conduct a hearing followed by a mediation session. This gives the judge the opportunity to make clear how he considers the case could be resolved short of a judgment. His views at that stage can be quite compelling.”
According to Kwan at Baker & McKenzie, “a Chinese party is more likely to comply with a settlement agreement and consent award reached in mediation proceedings than one which is imposed on it”. This is partly because compliance can be pursued in the courts. As Yang Ing Loong, a Hong Kong-based partner with Sidley Austin, notes, a “settlement agreement reached in arb-med [proceedings] can be entered into as an arbitral award, and is thus binding and enforceable.”
Arb-med proceedings have not been free from problems, however. “The mediation is not as simple as people may imagine,” says Zhang Dong, a partner at Dacheng Law Offices. “It may require a mediator with more wisdom and experience.”
If they are not careful, the dual role played by arbitrator-mediators can appear to create a conflict of interest. An example of this arose in a 2011 case decided in the Hong Kong High Court, Gao Haiyan v Keeneye Holdings Limited, where an award made by a Chinese-seated arbitration was found to be unenforceable in Hong Kong as a result of actual or apparent bias (see China Business Law Journal volume 2 issue 6, Hong Kong court refuses to enforce mainland arbitration award). One arbitrator-turned-mediator and another newly appointed mediator previously unconnected with the case dined with a third party who was perceived to have influence over the respondents, and asked that person to “work on” the respondents to achieve a settlement. The decision raises red flags for China-based arbitrations given the tendency of Chinese arbitrators, noted above, to be hands on and to push parties to settle during either formal or informal attempts to mediate.
According to some lawyers, such incidents are commonplace in China. “I hear of these things all the time”, commented Jones Day’s Georgiou. “Even in their judicial system, as a party you can just roll up and have a chat with the judge. If you can do that in the courts, imagine what you can do in arbitrations.” And according to Huang Tao, a partner in the Beijing office of King & Wood, “such behaviour is not unusual in mediation and most people are even accustomed to it. Obviously the Hong Kong court is more sensitive to the justice of the mediation, although to refuse to recognize and enforce an arbitral award by citing the public policy principle is still controversial.” Some lawyers therefore advise avoiding arb-med in cases with an international element. David Bateson, a Hong Kong-based partner at Mallesons Stephen Jaques, suggests that “arbitration-mediation is not advisable if it involves possible enforcement of assets in Hong Kong or other common law jurisdictions.”
Emergency relief, expedited hearings
Apart from arb-med, other cutting-edge remedies now cropping up in regional arbitration commissions include rules providing for emergency relief and an expedited arbitration procedure. Both were introduced in response to concerns expressed by businesses about arbitration delays.
Although the ICC currently offers a procedure for a “pre-arbitral referee” to decide urgent provisional measures, this is only allowed where parties have previously agreed it. This measure will be updated in the upcoming ICC Rules revision (see box). The first regional body to offer more comprehensive pre-trial emergency relief was SIAC, which included in its revised 2010 rules a mechanism for both an expedited procedure (if the amount in dispute is less then S$5 million (US$4 million), or there is “exceptional urgency”) and also for emergency interim relief by an emergency arbitrator prior to the constitution of an arbitral tribunal. According to Professor Ge Huangbin, a former Head (China) of SIAC, “other arbitration institutions in the region do not provide these kinds of mechanisms, meaning that SIAC [arbitrations] may [offer] improved efficiency and speed.”
The measures were an immediate hit. Of the 88 arbitration cases filed with SIAC in 2010 after the rules were introduced in July that year, 20 were applications for the expedited procedure under the new rule, of which 13 were accepted by SIAC. Applications for interim relief have also resulted in several applications to SIAC that were decided in an impressively short timeframe.
So far, neither HKIAC nor CIETAC offer equivalent relief, although they have summary procedures for lower value claims. HKIAC secretary general Chiann Bao states that “we are considering such a framework, but there have not been any specific developments on this front yet”. As for CIETAC, under existing rules parties to an arbitration may apply to a people’s court via the tribunal for preservation of property orders after arbitration proceedings have commenced.
However, draft revisions to the CIETAC rules envisage changes in this area. First, according to Kwan at Baker & McKenzie, “the new rules expressly allow interim measures before commencement of proceedings and before service of the Request for Arbitration, [thereby] reducing the risk of the respondent frustrating an award by dissipating its assets.” In addition, according to Yang at Sidley Austin, “a new paragraph is proposed to give the tribunal power to grant any interim measures it deems necessary or proper at the request of a party”. Unfortunately, just what this means is unclear. In particular, it is open to question how Chinese courts would respond to an application to enforce an arbitral interim order. Revisions to the PRC Arbitration Law, whenever they arrive, are expected to address these issues.
Chinese companies often losers when arbitrating abroad
In a recent report in the Legal Daily, Professor Shen Sibao, vice-chairman of the China Academy of Arbitration Law, discussed the findings of a two-year study in which Chinese parties involved in cases before foreign arbitral tribunals were found to appear as respondents 90% of the time, and usually lost the case.
There are various reasons why Chinese entities seem so disadvantaged when arbitrating away from home. Perhaps the most obvious is that Chinese parties are simply unfamiliar with the right approach to take. “Chinese companies are not familiar with international arbitration rules,” says Zheng Xilin, a partner at Grandall Legal Group. “Many Chinese parties choose not to attend the hearing.”
According to Xu Sanqiao, an international arbitrator and partner at Jingtian & Gongcheng, Chinese enterprises should take care not to “blindly act according to their experience of the mainland arbitration practices”. Richard Hill, an arbitrator and partner in the Hong Kong office of Fulbright & Jaworski, points out that “unlike court litigation in places like Hong Kong, the partner in the law firm selected will usually act as the lead advocate, so it is essential to hire lawyers that have the experience and ability to carry out this function effectively”.
One theme picked up repeatedly by lawyers at Chinese firms is that international arbitration tribunals have difficulty getting to grips with Chinese law. According to Jim Qiu, a partner at Yao Liang Law offices in Shanghai, “those in charge of arbitration tribunals are often foreign arbitrators who do not understand Chinese language and are not familiar with Chinese laws – this can affect their understanding and acceptance of Chinese lawyers’ viewpoints.”
A lack of familiarity with international legal practice is also a disadvantage for Chinese parties. Any failure to give full disclosure of requested documents may lead international arbitrators to draw adverse inferences. Hong Kong-based arbitrator Peter Caldwell says that in his most recent case involving a mainland Chinese company, “the Chinese company prevailed. However, they initially refused to take part in the proceedings and gave the impression of being untrustworthy. Only when it became obvious to them that I was going to proceed on the evidence before me did they submit convincing rebuttal evidence”. Caldwell continues: “My impression was that they had very limited input by experienced arbitration practitioners – this appears to be a common theme.”
Chinese witnesses are often unsure how to present their evidence, and uncomfortable with the adversarial techniques employed by foreign lawyers. As Charles Qin, a partner at Llinks Law Offices in Shanghai says: “In international arbitration, the tribunal focuses on the behaviour of the witness when he or she gives testimony, rather than on the evidence itself. Witness credibility will often be the focus of attack. If witness statements are inconsistent, or if witnesses seem to be avoiding an issue or hiding facts, or if all witnesses use the same statement, the value of the testimony is very likely to be undermined.”
Language may also be a factor. “A language barrier often arises when a witness testifies during a hearing, or during consultation with legal experts who are responsible for providing a written legal opinion. Poor language proficiency or inaccurate translation can directly affect an arbitration award,” says Donna Li, a senior partner at AllBright Law Offices.
Facing such disadvantages when arbitrating internationally, one thing Chinese parties can do is to change the rules of the game. The fact that an arbitration is held in an international forum does not necessarily mean the parties are bound to adopt the rules of the institution in which the tribunal is formed. As Qin says: “Chinese companies have the right to select whatever rules they need.” As a result, two trends are now emerging. First, the increasing number of Chinese enterprises that agree to international arbitration tend to opt for Hong Kong as the forum because of its cultural and linguistic affinities. Second, where Chinese companies have sufficient bargaining power, they are pushing for international arbitrations to adopt Chinese procedures and for contracts to be construed according to Chinese law.
One topic easily ignored by parties when drafting China-related contracts is how arbitration costs vary from tribunal to tribunal. Usually, clients negotiating arbitration clauses focus on other issues, such as the seat of the arbitration. As Hong Kong-based arbitrator Caldwell observes, “I don’t think people choose arbitration because its quicker or cheaper, they choose it because it’s private, so they don’t need to air their dirty laundry in public and they have the advantage of enforceability, which is not necessarily true of a judgment.”
Nonetheless, arbitration costs can vary widely according to the location, the number of arbitrators involved, and the amount in dispute. A comparison of international arbitration costs applicable to various dispute thresholds was carried out by Stephenson Harwood solicitors Louis Flannery and Benjamin Garel and published in Global Arbitration Review in mid-2010. The survey covered eight major arbitration forums worldwide that charge fees as a percentage of the sum at issue and included the ICC, the HKIAC and the SIAC. CIETAC fees were not included in the analysis but we have calculated equivalent CIETAC charges from the fee schedule on CIETAC’s website, then applied the analysis to disputes with monetary values of US$1 million, US$50 million and US$500 million.
In some ways, the results are unsurprising. When relatively small amounts are at stake, CIETAC arbitration fees are cheaper than elsewhere, reflecting the low arbitrator fee scales adopted by CIETAC and more streamlined procedures that usually involve neither discovery nor exchange of witness statements. The cost of ICC arbitrations, meanwhile, was relatively high. Given the extra layer of services provided by the ICC, including the “ICC Court” that among other things scrutinizes tribunal orders for procedural irregularities, this is also unsurprising.
Once the amount in dispute rises, however, CIETAC fees begin to converge with those of other tribunals and actually surpass them in big money cases. ICC tribunals, by contrast, are more affordable at these higher levels, suggesting, as Hong Kong ICC arbitration committee chair Rooney notes, that ICC arbitration “lends itself to cases that are of medium to higher value – simple cases just don’t need the same level of supervision”.
Costs of proceeding before the HKIAC are generally lower than average across all thresholds, reflecting its roots in ad hoc arbitration and a “light touch” approach that dispenses with scrutiny of awards. Hong Kong-based parties also have the option of paying arbitrators on an hourly basis if they choose. According to Caldwell, “the HKIAC was set up because people thought the ICC was too expensive and that ad hoc arbitration was preferable. The pendulum has swung back a lot recently. We’re getting a lot of administered cases, but we only brought in our administered rules two or three years ago, whereas Singapore has been using administered arbitration since it was set up, so it has a lot more administrative cases than Hong Kong.”