Resolving Disputes in China – CIETAC Implodes

November 26, 2012

An annoying side effect of doing business anywhere is having a dispute. At some point, most businesses end up in court, arbitration, mediation and/or protracted settlement negotiations about some matter. One of the considerations about doing business in China, or any country, is whether there are efficient tribunals available to allow your matter to be resolved fairly.

China’s court system has yet to be considered competent and efficient by foreign investors.  By western standards, Chinese judges don’t like to judge. At the end of the day in court, the judge usually tells the parties to go work it out on their own instead of making a decision. And even many Chinese lawyers recognize that the majority of judges outside the more sophisticated large cities can be biased and incompetent.

So, foreign investors take their cue from the locals and try to avoid going to court if at all possible. When negotiations aren’t working, the recommended alternative is arbitration. The New York Convention, signed by 147 countries, allows arbitration awards to be enforced in any court of a participating country.  The theory is that parties can get their dispute resolved by a competent and unbiased arbitrator (or panel of arbitrators), and take it to the appropriate court to be enforced if necessary.

When the goal is to get a competent and unbiased arbitrator, the choice of arbitration tribunal is paramount. In China, the premier arbitration body is CIETAC (China International Economic and Trade Arbitration Commission). Most foreign investors would rather use anything but CIETAC for multiple reasons, including competency issues and anti-foreigner bias, but may get stuck there. If the foreign investor forms a company in China, which is typically required to do business there, and the dispute is with another Chinese company, Chinese law must apply. International and offshore arbitration forums won’t decide a case under Chinese law between two Chinese companies, the same as CIETAC won’t decide a case under New York law between two American companies.(i)

Having to use CIETAC is bad enough, but now CIETAC itself is fracturing. CIETAC is based in Beijing and has sub commissions and branch offices around the country. In August, CIETAC-Shanghai declared its independence from CIETAC-China and CIETAC-China responded by booting both the Shanghai and Shenzhen sub commissions. It would be like the American Arbitration Association decertifying its chapters in New York and San Francisco – with the major exception that we have many other options for arbitration in the US. And what is also discouraging is that Shanghai and Shenzhen revolted because CIETAC-China pushed out rule changes they didn’t like. The new rules provide the tribunal with more flexibility in how it handles cases and brings the rules more in line with international standards.

What does this all mean? If you are unlucky enough to have a dispute about a contract that states your disputes will be resolved by CIETAC-Shanghai or CIETAC-Shenzhen, you’ve chosen now non-existent forums. Instead of preparing your case under pre-agreed rules, your first order of business is to reach agreement with your antagonist about how to resolve your dispute. Will you use CIETAC-Beijing, the new CIETAC Shanghai Commission or new South-China Commission, or will one of you race the other to the People’s Court in your jurisdiction (hmm, wonder which side would consider that?).

Travelling to Beijing may be quite inconvenient for both parties, yet the new Commissions both exist in contravention to PRC law and are completely unknown quantities. Their status as arbitration tribunals might be revoked by the government or they might be reunited with CIETAC-China under new rules at any point in the process. None of these are good choices.

The CIETAC split occurred in early August. It’s now four months later, and nothing has happened except that the new tribunals are working on setting up shop. Will they be allowed to continue? If you were putting together a new deal in Shanghai, what dispute resolution process should you choose? If you choose nothing, you aren’t prohibited from using an arbitration tribunal if you want to, the problem will be getting an agreement to do so with your opponent at the time. What if the new tribunals get a reputation for being more foreigner friendly? Or less competent? Frankly, your choices stink. Your only option is to make your deals work. Guanxi anyone?


[i] For a short time, mainland China said its courts would recognize rulings issued by the Hong Kong International Arbitration Center, but that did not prove true. Hong Kong’s legal system has not been fully integrated with the rest of China.

Cindy Wolf is a Colorado lawyer with more than 25 years experience representing large and small domestic and multinational companies. Her expertise is in corporate law and commercial contracting, with an emphasis on technology licensing and the Internet. She can be reached at cwolf.esq@gmail.com.

This publication is provided for informational purposes only. It does not constitute legal advice. There is no implicit guarantee that this information is correct, complete, or up to date. This publication is not intended to and does not create an attorney-client relationship between you and the author.

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Confusion and Lies about the Cloud

November 15, 2012

The cloud (as far as the computing version) is still a mystery to most Americans. What I found most amusing about this survey from Wakefield Research is that people who don’t know what it is (which is a majority) try to fake it – and believe that the people they are talking to don’t know what they are talking about either. 17% even pretended to know what it was on a first date – must be something we think will be impressive since no one really understands it. I guess it’s not too surprising considering the technical definitions which include concepts many have never heard of, but that some people actually thought it was related to weather, pillows, drugs and toilet paper is rather shocking. See Forbes’ take on it here: Americans Unclear.

Why Corporations Behave Badly

November 14, 2012

I once worked for a company whose slogan was “Working for Shareholders”. As an employee, I thought it was a callous motto but at least they didn’t pay us lip service with such platitudes as “Our employees are our greatest assets” or “Customer satisfaction is our number one goal.”

In fact, as a public company they were only restating their legal obligations. Any company’s foremost obligation is to its shareholders. The directors and managers are assigned the task of creating value for them by law. So, does this mean that companies have the obligation to cut corners, pollute and take advantage of their employees if it creates more “value” for the shareholders?

Of course, companies also have the obligation to comply with other laws which limit those bad acts. But these are the regulations that bring out the free market radicals. According to this philosophy, the free market will punish those companies that pollute, produce dangerous or shoddy products or abuse their employees. Unfortunately for them, history has not supported this approach. Unfettered corporate greed has created some bad consequences for some actors no doubt, thinking back (not so very far) to several market crashes. But workers, customers and society usually pay the price.

So it’s this requirement to create value for the owners that makes corporations resist new health care mandates, environmental regulation, safety precautions, employment rules and all those other “nanny state” traits – and which is exactly why we need them. Prior to the rise of unions and wage and hour laws, companies used to hire children, make them work 12-15 hour days under dangerous and unhealthy conditions and pay them pennies. Adults weren’t treated much better. Companies who did not take that approach had a hard time competing (and employees didn’t have better choices), so the market wasn’t going to correct them. It took laws to make them stop, despite the efforts of union busting Pinkerton agents.  Unions have lost relevance to most of us, but we should remember that they did us all a great service once upon a time – that is unless you are only an investor and have never worked for a living.

The loudest corporate defiance since the election has been about Obamacare, where a few companies (e.g., Papa John’s Pizza and Applebee’s) have already announced that they will have to fire employees instead of provide them with the required health insurance (or pay the measly fine). If this is really what they need to do to create value for their shareholders, then this is what their corporate charter requires. So far, it doesn’t seem to be affecting Domino’s, Denny’s and other large restaurant chains. And for those of us who would rather frequent a locally-owned restaurant, the 50 employee threshold on the health insurance requirement will actually make them more competitive.

Environmental regulation is often cited as a reason that Democrats are bad for business. Making companies take expensive steps to keep waste from polluting the earth is in contradiction to creating the most wealth for shareholders. But, some companies have learned that creating less waste decreases production costs thereby increasing net profits – too bad finding the ways to decrease waste wasn’t important until waste disposal became a legal issue. And, it took a lot of damage to the earth before most people became aware that something needed to be done about stewardship to our planet.

The recent announcement by Murray Energy that the Obama administration’s “war on coal” is forcing that company to lay off employees misses the bigger picture – the market impact that cheaper, cleaner natural gas has had on the coal industry and the fact that the Clean Air Act was signed into law by Richard Nixon. The first rules regulating mercury emissions from coal fired power plants were issued in the 1960s, which led to development of far more power stations fueled by alternatives to coal. This has been coming for fifty years. It appears Charles E. Murray was literally banking on Romney bailing out his already failing industry. Maybe we should appreciate that Murray Energy has hung on so long under these market conditions.

And the list goes on with other regulatory categories. The tension is built into our corporate code when “value” is only interpreted to mean monetary wealth. However, if shareholders accept that “value” includes social responsibility, corporations don’t have to behave badly to create value.

Cindy Wolf is a Colorado lawyer with more than 25 years experience representing large and small domestic and multinational companies. Her expertise is in corporate law and commercial contracting, with an emphasis on technology licensing and the Internet. She can be reached at cwolf.esq@gmail.com.

This publication is provided for informational purposes only. It does not constitute legal advice. There is no implicit guarantee that this information is correct, complete, or up to date. This publication is not intended to and does not create an attorney-client relationship between you and the author.