Using International Arbitration to Resolve Disputes in China

Even experienced multinational corporations are sometimes frustrated by the logistics of resolving disputes and enforcing judgments overseas. Rather than rely on the vagaries of local courts, more and more businesses are using international arbitration as an alternative to foreign litigation and are building arbitration provisions into their joint venture agreements and other cross-border contracts. The result is a dispute resolution process that is more transparent and cost-efficient, with awards that are generally easier to collect.

As foreign businesses invest in the extraordinary market opportunities in China, international arbitration has also become the preferred method for handling disputes with Chinese partners or with other foreign corporations over operations in China. The good news is that the Chinese arbitration process has increasingly gained a reputation for fair and impartial handling of disputes, without an insurmountable bias in favor of Chinese parties. However, managing an arbitration in China is a different experience – legally and culturally – than businesses may expect from dealing with similar disputes in the U.S. or Europe. To be successful, a business must understand the protocol for arbitrations in China and have access not only to experienced arbitration counsel but also to local Chinese lawyers who can help provide invaluable in-country logistical support.

Keep in mind, of course, that you can help yourself and gain much more control over the dispute resolution process in general by anticipating and providing for disputes in your original contract. You should always make sure that you have a properly drafted arbitration clause in your contract, which stipulates how disputes will be defined and resolved, the venue for arbitration, the governing law, and, in most cases, very specific details about how the arbitration is to be conducted.

To the extent that you can arrange for dispute resolution in your own backyard – in the U.S. under U.S. law – you will obviously save money in terms of administration and travel and, potentially, give your business something of a "home field advantage." However, the practical reality is that this is often not possible, and that your business partner will insist on dispute resolution in China.

Chinese Arbitration Forum: CIETAC

China is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly referred to as the New York Convention. This means that any arbitral award involving a Chinese entity is generally enforceable by and against that entity, both in China and in other countries that are signatories to the New York Convention (which includes more than 125 countries, including the United States). This international enforceability of awards is one of the key advantages of arbitration.

If your business becomes involved in a dispute with a Chinese company or with a non-Chinese foreign corporation over operations in China, you would most likely seek resolution of the dispute via the China International Economic & Trade Arbitration Commission (CIETAC). CIETAC, which dates back to the 1950s, is the best known and most highly regarded arbitration forum in China and has jurisdiction over disputes between foreign enterprises operating in China and between foreign enterprises and Chinese companies.

CIETAC has built a growing reputation for competence and fairness. Surveys of non-Chinese companies participating in CIETAC arbitrations have reported increasing confidence in the impartiality of the process. This stands in substantial contrast to the Chinese lower courts, which continue to be dogged by a reputation for bias, delays, and unpredictable results.

When conducting an arbitration through CIETAC, parties must pay a filing fee in advance, which is normally calculated based upon the value of the claims and counterclaims. In our most recent experience, the filing fees were in the range of $35,000 for a dispute involving claims of approximately $5 million. We also had to pay in advance the compensation for the person we selected for the three-person arbitration panel, which amounted to $10,000.

As with any dispute resolution process, arbitration is not inexpensive, particularly when you, your counsel, and other parties need to make their way to China for the arbitration itself. However, a CIETAC arbitration venued in Shanghai, Beijing, or Shenzhen (the only cities where the arbitration can be done) is relatively cost-efficient when compared to other international arbitration centers and organizations, such as the International Chamber of Commerce in Paris, the London Court of International Arbitration in London, or the American Arbitration Association International Center for Dispute Resolution in New York.

The CIETAC Process

The CIETAC arbitration panel generally consists of three members from an approved CIETAC list, one selected by each party, and a chair appointed by CIETAC itself. In our most recent experience, for example, we selected a Canadian law professor who was experienced in CIETAC arbitrations, knowledgeable about Chinese law and fluent in Mandarin. Our opponent chose a local Chinese attorney. CIETAC then appointed a Chinese law professor from Fudan University as chair of the arbitral panel.

The arbitration process is handled quite differently from the litigation process with which U.S. businesses may be familiar. While CIETAC arbitration rules are similar to those used by other arbitral organizations, it is helpful to be familiar with specific components of the CIETAC process. For example:

Discovery basically doesn't exist. Instead of sweeping access to the other sides' documents (as would be true in litigation), you are largely limited to supplying documentary evidence to support your own claim and to refute the complaint from your opponent.

Testimony can be oral or written. If the parties agree, the panel may choose to hear the matter based on documents only, rather than live witnesses – not a good idea for a U.S. company.

Be ready with witness affidavits. It is the wiser course to prepare testimony from all of your witnesses in the form of written affidavits. The panel routinely accepts affidavits, but it may not necessarily permit a particular witness to testify in person. Parties submit the names of potential witnesses in advance, but, depending on the panel, you may not find out who can and cannot testify until the arbitration begins.

The arbitration panel may appoint its own experts. If the panel believes it's appropriate, it may appoint its own expert to assist in its investigation. If a party has its own expert, that person may or may not be permitted to testify, and the expert's testimony and report will generally be made available to the opposing party.

You may be asked to sign transcripts that you won't receive. The panel generally makes audio tapes of the proceedings. Portions of the hearing are sometimes transcribed, and your counsel may be asked to sign and verify the contents. But CIETAC does not make the transcript available to the parties.

The panel may help settle the dispute. If the parties request it, the tribunal may stay the arbitration proceeding and attempt to assist the parties in conciliating the dispute. Either of the parties, or the panel itself, may subsequently terminate the conciliation process and return to the arbitration.

Lessons Learned

Based on our most recent experience with arbitration in China, we can share two key lessons that will maximize the likelihood of a successful outcome.

First, be ready to arbitrate. That seems logical, doesn't it? Isn't that what you're there for? But in fact, businesses that are more interested in settling the dispute sometimes fail to prepare adequately for the arbitration and therefore increase their vulnerability. We discovered, for example, that the opposing side had not arranged for a key witness to be physically present for the initial proceeding. By contrast, we demonstrated through our witnesses and affidavits that we were prepared to move immediately into the arbitration phase with a strong defense. This combination of preparation and circumstance helped leverage the subsequent settlement negotiations, which concluded after the arbitration tribunal was sworn and the proceedings commenced.

Second, have local, on-the-ground support. For us, the availability of our Shanghai office was invaluable. We had access to Chinese lawyers for translation, advice, interpretation of documents, preparation of witnesses, and knowledge of local law and practices. The office itself also provided key logistical support in terms of data access to our client's U.S.-based research center and records library, space, and other administrative and technology assistance. For example, when several boxes of demonstrative evidence were held for inspection in Beijing for 20 days (barely arriving in time for the hearing), we had backup copies of the material sent electronically to our Shanghai office.

Overall, businesses operating in China are likely to find themselves before a CIETAC arbitration panel in the event of a dispute with a foreign or domestic partner. In that event, it is possible to get a fair hearing and a successful result. But don't assume that arbitration in China is the same as in other venues around the world. Instead, just as you would research and understand the business culture before launching a joint venture, you should similarly take the time to understand the Chinese legal culture that will influence the outcome of your dispute.