When You’re Up the Creek Without a Paddle in China
Like everyone else, you know that China is the next ‘big thing’ in the business world. You’ve joined the growing thousands of foreign companies starting a joint enterprise with a Chinese business. After all: they have knowledge of the law, of the customs, and guanxi. Incidentally, Chinese Negotiation offers an excellent article on why guanxi is important, but perhaps not as much as it is often made out to be. Being savvy, you make sure there’s an appropriately drafted arbitration clause in your contract, listing CIETAC as the arbitration board. However, when you’re both up the creek and the paddle gets dropped, what exactly can you expect from Chinese arbitration?
First steps: pre-conditions to arbitration
As previously mentioned, before anything else can happen, there must be an arbitration agreement. In 2006, the Supreme People’s Court issued its Interpretation on Certain Issues Relating to the Application of the Arbitration Law, specifying that this agreement may be in the contract, or any other written form concluded before the dispute occurs. Foreigners must be aware that such agreements – essentially, any written correspondence – can be legally binding, even in the absence of a signature.
The initiating process
Those drafting contracts should also be aware that China is particularly fond of alternative dispute resolution. Thus, upon proof of an arbitration agreement, litigation is impossible unless, and until, the process fails (Article 26, Law on Chinese-Foreign Contractual Joint Ventures). As such, either party may apply to CIETAC with their specific claims and arguments (Articles 21 & 22, Arbitration Law 1995). Within five days, the tribunal will grant or deny the application.
The next step in the process is for each party to select one arbitrator each, with a third chosen mutually or by CIETAC (Article 31). This procedure exists not to allow bias or encourage an adversarial structure – arbitrators are required to act impartially and independently of the parties, the government and the administration – but to allow the parties to choose arbitrators who are technically capable and sufficiently experienced in what are frequently complicated subject matters.
And, to prove that there is an exception for every rule, the prohibition against foreign lawyers practising in China does not apply in arbitration. If you choose to be represented, and it is by no means mandatory, you may engage any person or persons regardless of nationality or professional experience (Article 16, CIETAC Arbitration Rules 2005).
A break in the party: conciliation
At any point in the entire process, the parties may – and are often highly encouraged to – temporarily postpone arbitration in exchange for conciliation (Article 40, CIETAC Arbitration Rules). Conciliation is, at all times, non-binding but it is often in the interests of the parties to participate as it an informal method of creating a resolution to the problem as opposed to laying blame. It is usually also even cheaper and faster than arbitration, useful characteristics when time and money are being lost on dispute resolution whilst the business does nothing.
You can reach an agreement in conciliation with the contracting party by yourselves, or through the mediation of the arbitrators. In either case, such an agreement is deemed by the courts to be an agreement reached through arbitration and therefore legally binding.
Arbitration
If conciliation doesn’t happen, breaks down or fails to conclude within 30 days, the tribunal returns to arbitration. The tribunal’s jurisdiction is restricted to:
a) disputes over contracts, property rights, and other interests of legal persons (Article 2, Arbitration Law);
b) the issues outlined in the arbitration agreement between the parties; and
c) the issues stated in the application to CIETAC.
Where any of these are exceeded, an award made by the tribunal is invalid.
Assuming jurisdiction exists, though, the tribunal has complete leeway to examine the case in any way it chooses (Article 29, CIETAC Arbitration Rules, 2005). Evidence can be adduced through oral testimony, purely documentary, through the tribunals’ own investigations, or a combination thereof and the proceedings are private, and not released beyond the parties. The only exception to any of these rules is by agreement otherwise between you and your opposing party.
The Award
The principal benefit of an arbitral award is that they are generally final, and subject to review only on procedural grounds. This means a decision is often faster and cheaper through arbitration than litigation. Nor can further arbitration be conducted, unless the award is cancelled, or its enforcement disallowed by a people’s court.
Generally, within China, an award may only be refused where (Article 63 Arbitration Law, Article 217 Civil Procedure Law):
- no arbitration agreement existed;
- the arbitration tribunal exceeded its jurisdiction;
- there was insufficient facts on which to base the decision;
- the application of law was incorrect; or
- the award contradicts a social and public interest.
In addition to being final, it is also relatively quick and easy to enforce both in and out of China, thanks to the New York Convention on the Recognition and Enforcement of Arbitral Awards 1958. This is vital considering the difficulties often faced by civil litigants attempting to enforce a foreign decision in China.
Whilst the finality of arbitration in Chinese-foreign disputes may preclude you from a second chance if the decision doesn’t go your way, at the very least you know to start bailing, instead of hoping an oar might soon float past.
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