Trade with China – Arbitrage in China

It is very hard to avoid conflicts in business. It gets even harder, when both parties come from two different countries and represent two different cultures and traditions. That’s the case of doing business in China. Sometimes it is the court passes the judgment and resolves the matter, but it takes a lot of time and money, hence the growing popularity of arbitrage and mediation.

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Let’s analyze the following case: company X outsourced the production of its new product to China. The initial shipment was all right, but after some time the product’s quality deteriorated and the Chinese supplier turned a deaf ear to company X complaints. Company X lawyers quickly analyzed the contract, which included an arbitration clause, sounding very much like: “Any dispute, controversy or claim arising out of shall be resolved by arbitration”. But the problem arises here: in terms of Chinese law (to be precise, the Article 18 of the Arbitrage Law) this clause is not valid at all. Without clearly stating an arbitrage institution, we have no choice but to go to Chinese court, which is a costly and inefficient way of conflict-solving.

A couple of years ago, Chinese contractors often agreed for European arbitrage, many have chosen arbitration by the Stockholm Chamber of Commerce. Contract attorneys always persuaded their Western clients not to agree for arbitrage in China, mostly because of the related risks (Chinese language proceedings, fear of unfair treatment) and costs. Nowadays it is rather unlikely, Chinese businessmen no longer want to participate in arbitration procedures outside their country. Paradoxically, it has several positive sides: as we know, foreign arbitrary institution settlement comes into effect only when a declaration of enforceability is issued by the Chinese court. There have been several cases, in which People’s Courts in China refused to enforce the judgment and the foreign investor was left with nothing. On the other hand, when we get the favorable judgment from the Chinese arbitrary institution, it will come into force almost automatically.

There are several differences between the arbitrage procedures in China and in the other countries. We already mentioned the requirement to clearly select and specify an arbitration commission to administer our potential disputes. China’s arbitration law does not allow for popular and useful ad hoc arbitration. In the arbitration process, the emphasis is placed on mediation and reaching compromise, in the spirit of Chinese 双赢 (“double-win” or rather “both sides win”) idea. Only when the mediation doesn’t reach its aim, the arbitrator takes final decision. If we decide to put our case before the arbitrage court in China, we should know that according to Article 67 of the Arbitrage Law we can choose foreigners to perform functions of arbitrators and experts.

As of 2010, there are 206 arbitrage courts in China. The oldest and most prestigious is CIETAC (China International Economic and Trade Arbitration Commission), established in 1956. The arbitrators are chosen from a list prepared by CIETAC, the quality of arbitration is high, but recently there was a breakup between CIETAC and its Shanghai subcommission, Shanghai people decided to become an independent entity, they have change the rules of arbitration and took the name of SCIETAC (South China International Economic and Trade Arbitration Commission) or SCIA (Shenzhen Court of International Arbitration). The conflict is not likely to be solved in the nearest future, so we should either specify that our case will be handled by central commission of CIETAC in Beijing, or seek help from the other institution, such as BAC (Beijing Arbitrary Commision).

If we decide for arbitrage outside China, two Asian institutions seem to be the natural choice: SIAC (Singapore International Arbitration Centre) and HKIAC (Hong Kong International Arbitration Centre). SIAC procedures are quite similar to those used in Western Europe arbitrage courts; those in HKIAC are more like rules of ad hoc arbitrage (f.e. the main arbitrator is elected by two arbitrators, chosen by the parties).

 

No matter which institution we choose, we need to remember that the proper preparation is the key to success. We need to gather evidence and present our arguments convincingly. The cost of arbitrage procedures is very small, if compared with the expenses we may face in case of an unfavorable outcome. Therefore we should not count every penny spent on Chinese legal services (which may be surprisingly expensive). And we should not lose the battle before it even started by drawing inappropriate contract terms.

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