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 firstname.lastname@example.org.
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.