Resolving disputes is big business and not knowing the ground rules at home and abroad will cost you dearly, writes Raymond Yang. Your move.
As China has expanded its overseas ownership of assets via bargains and fire sales following the global economic crisis, more and more Chinese companies and their counsel will be drawn into cross-border disputes on battlegrounds that may be unfamiliar, and at times less than even, terrain.
In China, foreign companies and international law firms habitually grapple with a system they complain is less than impartial. When conflict flares abroad these same companies may point to that perception of bias to pursue victories via litigation or otherwise against the assets of Chinese companies in overseas jurisdictions.
Now, more than ever, dispute resolution strategies are crucial for counsel and the firms that advise them.
New rules are being drawn in China and arbitration centres are clawing for more business, but litigation is still the popular option. However, the outlook for Chinese companies in overseas court battles remains unoptimistic.
Pointing to the big differences between Chinese and foreign legal regimes, and the staggering expenses on overseas court proceedings, Dong Chungang, a partner at Beijing-based law firm Jingtian & Gongcheng, says: “In foreign court proceedings, Chinese companies often face a lot of difficulties, suffer heavy losses or are treated unfairly.”
To the point. As MWE China Law Offices’ Shanghai-based partner Henry Chen points out, in the US litigation can be very expensive. Take IP, for example, the most commonly seen type of cross-border litigation involving Chinese companies in overseas courts, and of foreign companies in China.
Chen says a primary reason for the expense is that there is discovery in the US, and generally there is a right to a trial by jury in its federal courts. Discovery in a complex US IP litigation can involve tens of thousands of pages (or more) of company documents, as well as the depositions of dozens of witnesses. Trial by a jury in US federal courts can last weeks or months.
In addition, many Chinese companies are not armed with sufficient global vision before heading abroad. “They are not familiar enough with the local laws and regulations of their targeted markets, and have not estimated the legal risks incurred because of the unfamiliarity when they make business decisions,” says Wilson Huo, a partner at Zhong Lun Law Firm in Beijing.
The arbitration turf war that erupted in August via the CIETAC website surprised some for its very public airing, but other experts in the field of arbitration say the dispute is a tree with long roots.
“The friction between CIETAC Beijing and Shanghai has already existed for a period of time,” says Wilson Huo at Zhong Lun Law Firm, adding the effectiveness of new rules and recent announcements from both sides “have rendered this friction formally being known by the public”.
The China International Economic and Trade Arbitration Commission (CIETAC) published an announcement on its official website on 1 August, saying its Shanghai and South China sub-commissions “have refused to enforce the 2012 China International Economic and Trade Arbitration Commission Arbitration Rules, and to have their operations continued to be administered exclusively by CIETAC”.
The announcement said that authorisation for the two CIETAC branches to accept arbitration applications and administer arbitration cases would be suspended with immediate effect. Clients who had agreed to submit their dispute cases to the two branches should from the same date file their applications with the CIETAC secretariat, which would handle their cases, it added.
The Shanghai and South China sub-commissions published a joint statement on 4 August, claiming CIETAC’s announcement was not binding upon them or their clients because their arbitration jurisdiction originated from agreements with their clients, rather than an “authorisation” by any other agency. The statement said they would continue to accept and administer the cases to be arbitrated by them as agreed by their clients.
Lawyers say the introduction of the 2012 CIETAC Rules is undoubtedly the element that lit the fuse to the dispute.
Terence Wong, a partner at Hogan Lovells in Shanghai, observes that the language of the rules had the effect of turning the sub-commissions into CIETAC’s outposts, rather than their remaining “integral parts” of CIETAC, and the sub-commissions saw the new rules as a challenge to their independence.
He adds that CIETAC Beijing asserted that the whole of CIETAC, including the sub-commissions, is under the direct leadership of the China Council for the Promotion of International Trade (CCPIT). But the sub-commissions claim that they merely co-operate with CCPIT, and that they are independent legal bodies registered with the relevant Shanghai and Guangdong authorities.
In accordance with the 2005 CIETAC Rules, a case may be accepted by CIETAC Beijing or any one of its branches only when a client agrees to submit the case to CIETAC for arbitration, but there is no specification that such cases must be arbitrated by a sub-commission. Former CIETAC deputy secretary-general and partner at Concord & Partners, Yang Chunlei, says this has made parties uncertain about where to submit a case. “There may even be an instance where many cases are filed with a sub-commission, but the parties lodge a counterclaim for choosing arbitration at CIETAC Beijing.”
Emmanuel Gaillard, global head of international arbitration practice at Shearman & Sterling in Paris, says under the new rules, “cases submitted to CIETAC will be administered by its headquarters in Beijing unless the parties have expressly consented to a sub-commission”.
Jessica Fei, a partner at Herbert Smith in Beijing, adds: “The change has been said to potentially reduce the number of new cases that the sub-commissions can handle.” According to Wong, as from March this year, the Shanghai sub-commission has not accepted cases that simply stated arbitration at CIETAC, because it considers that definition to be too vague.
Dong Chungang, a partner at Jingtian & Gongcheng in Beijing, believes the real reason for all the fuss is the “eruption of the prolonged underlying problem with the structure” of CIETAC. “In some aspects, it indicates Chinese arbitration organisations still have a long way to go before becoming truly independent and private organisations,” Dong says.
Henry Chen, a Shanghai-based partner at MWE China Law Offices, goes further: “This dispute has highlighted the differences between Chinese arbitration organisations and their overseas counterparts, as they are still non-private organisations.”
Cedric Chao, co-president of international litigation and arbitration practice at Morrison & Foerster in San Francisco, says the friction is a setback to the emergence of CIETAC as an international arbitration provider.
Philip Nunn, head of litigation and arbitration, Asia at Fried Frank Harris Shriver & Jacobson in Hong Kong, is worried that if all the cases agreed to be arbitrated by sub-commissions are processed by CIETAC Beijing, this may result in CIETAC Beijing being overloaded with case referrals, which may cause delays to the administration of cases.
There are also concerns that CIETAC will become less attractive as parties prefer to select an arbitration organisation with a more friendly environment if the struggle continues and uncertainty remains, says Huo at Zhong Lun Law Firm. “The uncertainty caused by this friction will make some parties hesitant to designate CIETAC in new contracts until there is clarity over the jurisdiction and authority of the CIETAC regional commissions,” adds Chao.
In any case, other arbitration organisations will benefit from the conflict. “It is easier for Chinese clients to accept and adapt to Singapore International Arbitration Centre or Hong Kong International Arbitration Centre,” Dong says. Chen, at MWE China Law Offices, says Chinese domestic arbitration bodies like the Shanghai Arbitration Commission will not miss this opportunity.
Parties that have agreed to arbitration by the Shanghai or South China sub-commissions may also encounter greater risks. “The awards issued by the sub-commissions after the issuance of the announcement may be challenged and potentially denied recognition and enforcement on the ground that the sub-commissions have no jurisdiction over the cases,” says David Livdahl, chair of the Beijing office of Paul Hastings.
Lawyers believe there is plenty of room for conflict between opposing parties. If a party submits a case to a sub-commission for arbitration as agreed, the other party may claim that the sub-commission has no right to accept it, as its authorisation has been suspended by CIETAC. However, it is not completely risk-free to have the dispute submitted to CIETAC Beijing because the other party may then argue that CIETAC Beijing is not the arbitration body agreed upon in an arbitration agreement.
It seems the key to solving the row is to figure out whether sub-commissions are independent arbitration commissions, as provided for under the Arbitration Law. If they are, then according to article 14 of the Arbitration Law – that there is no relationship of administrative subordination between arbitration commissions – the sub-commissions are independent arbitration bodies not subject to suspension of authorisation as stated in the announcement. More likely is the conclusion that the sub-commissions are outposts of CIETAC, and parties that have agreed to arbitration by sub-commissions all face that risk.
“The ultimate outcome of the dispute will be in the hands of the Chinese regulators; it is too early to predict what will happen,” says Fei.
Fortunately, lawyers offer some valuable recommendations. “Since there is no dispute over CIETAC Beijing’s own jurisdiction to administer cases, and while the controversy between CIETAC and its sub-commissions continues, for any new contract, it is best to provide for arbitration by CIETAC, rather than by one of its sub-commissions,” says Livdahl. He also recommends that arbitration outside of mainland China be selected, when it is permitted under Chinese law.
As to any agreement under which arbitration by a sub-commission has been agreed, Xing Xiusong, a partner at Global Law Office in Beijing, advises the parties to “make necessary changes and clarifications to the arbitration clauses before a dispute arises, by entering into a supplemental agreement”.
Zhang Shouzhi at King & Wood says: “If the parties to the arbitration have reached a consensus, the agreement should be effective and will not cause a substantial legal risk. However, in the choice of arbitrators, the safer approach is to select two arbitrators who have both been recorded in the Register of Arbitrators”.
The toughest problem is where a dispute has already arisen. The ideal solution is for both parties to learn from the practice of the International Court of Arbitration by signing a written memorandum under the auspices of an arbitration tribunal after the dispute is referred to CIETAC, in accordance with the CIETAC notice, saying both parties are willing to have the case arbitrated by CIETAC. However, CIETAC’s announcement is not clear enough about whether the cases now being handled by the sub-commissions will be affected by the suspension of authorisation. “The suspension may be limited to the new cases accepted by the sub-commissions,” says Wong. “But we cannot rule out the possibility that a losing party in a case already decided will apply for revocation or non-enforcement of the award on the ground of the suspension of authorisation.”
Apart from adopting the above precautions, “the most effective solution,” says Xing, “is for CIETAC to work together with its sub-commissions to resolve the present impasse as soon as possible”.