Friday, October 5, 2007

“Mandarinize” Your Arbitration Clause for China

Someone once analogized international arbitration in China to playing the Chinese Chess. Here it goes:

Chinese Chess or Xiangqi has been played for thousands of years. The game shares common ancestry with the more familiar International Chess, but it also has differences that make it unique. Likewise, resolving disputes by arbitration in China is similar to that conducted at any major international arbitration centre - except that there are some features unique to China.
Despite the Chinese government’s grand visions for improving China’s legal system and the actual incremental progress in its judicial process, most international investors still prefer arbitration to solve their disputes arising out of their China-related transactions. Arbitration, undoubtedly, can be an efficient, private, and economical way to solve disputes that preserves cross-border relationships and confidentiality. However, satisfactory arbitration results very often hinge on the content of the arbitration clause/agreement itself. To reduce the risk of arbitration proceedings going awry in China, foreign investors must know the rules of the game in China and adjust their strategies accordingly.

A. To gauge whether an arbitration clause/agreement is China ready, it is very important that one includes the following provisions:

1. Clear expression of intention to arbitrate

2. Specification of an arbitration institution

For example, Shanghai sub-branch of the CIETAC

3. Scope of the matters to be arbitrated

Note that certain matters are not arbitrable in China, such as labor issues, family law related issues, and other administrative disputes.

In the recent disputes between Wahaha v. Danone, one of the arguments made by Wahaha to arbitrate in China was that there was a labor dispute between Mr. Zong and Danone, despite on-going parallel arbitration proceedings in Stockholm.

4. Language with which to arbitrate

For foreign parties, the most convenient language might be English, but make sure it is specified in this provision.

5. Governing law

To avoid uncertainties, parties should specify the substantive laws governing the interpretation of their agreement. It is, however, important to select laws of a jurisdiction with close reasonable connection to the transactions, and the governing law should be one sufficiently sophisticated to resolve the disputes. Additionally, make sure that the selected law allows the disputes to be arbitrated.

6. Situs/Location of Arbitration

The seat of arbitration should be specified (See above # 2). The CIETAC has multiple branches in China.

Some foreign investors, who want to skirt arbitration in China, should note that an attempt to arbitrate outside China will fail if such “foreign” parties are in fact organized under the Chinese law, i.e. wholly foreign-own enterprises. Nonetheless, parties, one of whom is foreign in the eyes of the Chinese courts, can agree to arbitrate outside China.

7. Choice and number of arbitrators

This is probably one of the most important provisions in the arbitration clause because the panel controls and determines the outcome of the arbitration. At the same time, this is probably the area about which foreign parties feel most uneasy about arbitration in China. Professor Jerome Cohen’s thoughts on Time to Fix China’s Arbitration, although a little outdated, shed light on the very issue. Subsequent to complaints and criticism regarding the formation of an arbitral tribunal, the CIETAC revised its rules (Chinese here; English here, giving parties more freedom in choosing the presiding arbitrator outside CIETAC’s list of arbitrators (subject to confirmation by the president of the commission).

To maximize neutrality, parties should agree to jointly appoint a presiding arbitrator from a neutral country. As is the norm, three arbitrators will suffice to constitute a panel.

B. Optional provisions for a China-ready arbitration clause:

1. Procedural rules

The CIETAC allows the parties to under rules of other arbitration institution, i.e. the ICC. However, ad hoc arbitration is not permitted in China.

2. Confidentiality

Article 40 of the Arbitration Law and Article 33 of the CIETAC’s Rules address confidentiality of the proceedings. Regarded as hallmark of arbitration, confidentiality is extremely important to parties involved, so a provision detailing the parties’ duty of confidentiality is neither excessive nor repetitive in spite of the above statutory and institutional guarantee of confidentiality.

3. Interim Relief

Only courts in China have the authority to grant interim relief in a pending arbitration. Typically, a party seeking relief must submit its request to the arbitration commission, which will in turn refer the request to a court with proper jurisdiction. A provision regarding interim relief is enforceable to the extent that it comports with the Chinese law.

4. Discovery

Recognized as another characteristic of arbitration, discovery is very limited to evidence supporting proponent's claims and refuting those of opponent's. Generally, written evidence is preferred in China, but parties may agree to have live testimony, which is probably better for a U.S. party. For an excellent read on this, check this out.

Dispute resolution should be a key component of planning for any international transaction, no matter how unlikely disputes may seem from the outset. As it is often said in China, one should always 未雨绸缪, meaning to prepare for a rainy day. In China-related transactions, one should prepare for resolving disputes in the contracting stage; and more importantly, one should prepare a China-ready method of dispute resolution. A careful examination of one’s arbitration clause might just save a lot of trouble in the future.

For additional reading materials on arbitration in China, I recommend this.

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