China: Arbitration Negotiation Tips

China Law Insight
Last Updated: 25 October 2010
Article by Meg Utterback, James Rowland and Ariel Ye

The majority of cases, whether in court or arbitration, are settled. Parties weigh a variety of factors from the start of the dispute to award, constantly performing a cost benefit analysis. Generally speaking, issues such as principle and precedent often preclude a settlement. Parties will refuse to consider a good settlement if it violates an internal principle, e.g. no payment, even nominal, in the absence of liability; or it creates a bad precedent, e.g. a payment to a fired employee that exceeds statutory severance requirements. A major driver is always market and business strategy. For years, many Chinese parties elected not to participate in off-shore arbitration reasoning that they were not particularly interested in developing off-shore business. The costs of litigation are always a driving factor. In today's global trade, many companies may face suits in multiple jurisdictions (e.g. British Virgin Islands, Hong Kong and the PRC) involving essentially the same facts and related parties. Multi-jurisdiction litigation is costly and may drive the parties toward settlement. This article seeks to provide some considerations in seeking settlement before and during arbitration.

Five Tips for Pre-Arbitration Settlement

Pre-Arbitration Tip No. 1- Know your Adversary

Suing and pursuing a judgment against a company without assets is fruitless. Always perform an asset check and you should make the check as broad as you can afford based on the amount in contention. If the jurisdiction of the adversary allows fraudulent conveyance, consider immediately bringing a local action to preserve assets. This action will give you leverage in negotiation. No company wants to have its assets encumbered. Be aware, however, that in most jurisdictions, you may be required to post security in the form of a bond or letter of credit in order to obtain such injunctive relief.

Pre-Arbitration Tip No. 2- In Person Meetings versus "Letter Wars"

"Letter wars" should be reserved for disputes that are likely to be arbitrated. You must document the course of the discussions, but there is a difference between posturing and documenting. If a cost benefit analysis is dictating that you settle a case, then sit down across a table, and discuss the situation. Email and correspondence are never as effective as face-to-face meetings. In the end the flight to Brazil will be far cheaper than three months of emails and letters.

Pre-Arbitration Tip No. 3- Consider a Third Party Intermediary

Often both parties have a relationship with an individual, who might serve as an intermediary. The individual must be devoid of any interest in the outcome of the dispute and must understand any cultural differences between the involved parties. Each party selectively advises the intermediary of its position and asks the intermediary to serve as a go-between.

Pre-Arbitration Tip No. 4- Consider Formal Mediation

Mediation, before or after initiation of an arbitral demand, can be useful if you select the right mediator. Look for someone with knowledge not only of the law but also the industry and/or the cultures involved.

Pre-Arbitration Tip No. 5- Know Your Adversary's Pressure Points

You should know your adversary's business plan as well as your own. Are they considering an IPO or fund raising? Have they recently changed the management team? Do they have end of year reporting requirements? When do they formulate the budget? What level of authority is required for the settlement you hope to achieve? What other lawsuits are they engaged in? Are they planning to bring a new product to market? Are they involved in any M&A activities? Understanding the internal drivers for your adversary are a key factor in winning your ideal settlement.

Five Tips for Settlement during Arbitration

Arbitration Settlement Tip No. 1 – Filing on all Fronts

In the global market place, there are now more options than simply filing the arbitration in one jurisdiction. More often than not, there are a web of agreements and companies with multiple dispute resolution clauses that will allow for litigation in more than one jurisdiction at a time. Seizing assets in China and the BVI, while filing for arbitration in Hong Kong, can increase the pressure on the defendant to seek a settlement. While this approach is costly, it can lead to an earlier resolution and thereby ultimately save long term costs.

Arbitration Settlement Tip No. 2 – Day One Strategies

On the first day of the arbitration, before your opening statements, be sure to remind your adversary of their case's weak points. Having this discussion before the arbitration opens will put your opponent on the defensive. This method tends to make the other side very aware of their cases weaknesses and somewhat defensive during their opening statement. It is often said that first impressions are the only impressions. If the first day of argument went well, revisit the reactions of the panel and the first day with the opposing counsel. You should be sure to highlight their deficiencies. Counsels often worry that proposing a settlement discussion is a sign of weakness. Ultimately, the timing for settlement negotiations is dependent upon your client's motivations and time table. Taking a hard line in settlement negotiations can often undermine any impression that the request for discussion was a sign of weakness. Don't be afraid to propose settlement discussions if the first day of argument seemed favorable to your client.

Arbitration Settlement Tip No. 3- Enlisting the Panel

In many venues, such as CIETAC in the PRC, the arbitrators actively encourage settlement. Parties must consider their comfort in allowing arbitrators to also act as mediators. If this scenario seems too risky, the parties can always enlist assistance from the arbitration organization or the help of a third party mediator in resuming settlement discussions. Arbitration panels are generally willing, within reason, to allow the parties additional time to negotiate, including a stay of proceeding or a calendar that allows adequate time for mediation before commencement of the hearing or next round of hearings.

Arbitration Settlement Tip No. 4 – Analyzing Change and Being Flexible

Arbitrations typically take a year or more to resolve from filing of the request to award. The parties' motivations and global economic circumstances can change greatly over a one year period. The considerations of arbitration in August 2008 are much different from the considerations in August 2010. Companies have changed their strategic plans. Adversaries, who previously had no off-shore activity, may now be expanding their business in other jurisdictions, or they may be retrenching. Avenues of enforcement may be available that previously did not exist. Similarly, an attractive target defendant may now be judgment proof. Your settlement threshold may change based on these events. Don't be static in your approach to the case; do not simply rely on your preliminary assessment to the client.

Arbitration Settlement Tip No. 5 – Being Relentless

Anyone engaged in international arbitration must be mindful that US discovery tactics are not always well received, and many arbitrators come from a civil law background. However, just because you forego aggressive discovery tactics, does not mean you should not zealously advocate for your client. If you know the opposition is in possession of helpful documents, you should pursue them. If the allegation is provable by tangible evidence, e.g. performance of a manufacturing line, then you should offer to run the manufacturing line to demonstrate the point. Putting pressure on the opposition will encourage settlement by increasing both the risk of losing and the costs associated with litigation.

A Word about Post-Arbitration Award Tactics

The battle is rarely won by the issuance of a favorable award. Enforcement continues to be a significant hurdle against defendants domiciled in countries where the rule of law is still developing. The defendant may have an advantage at the time of enforcement because enforcement typically occurs in the defendant's country. This circumstance often allows the defendant to make a cost of money argument in favor of settlement, relying on the uncertainty of enforcement and the certainty of delay in enforcement. An astute plaintiff will have already assessed the enforcement landscape and taken measures in advance of the award to facilitate enforcement. Enforcement should be the first strategic analysis in considering filing arbitration in many developing regions. If enforcement is unavoidable, a defendant will be more motivated to settle.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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