The article was originally written in Chinese, the English version is a translation. This article was first published in the firm's periodical China Bulletin April Issue, 2008, Vol.32)
Lacking knowledge of and exposure to China's judicial and arbitrational system, foreign companies usually worry about dispute resolution clauses more than any other clause in a contract. Deciding which arbitration tribunal and what arbitration rules to specify becomes a sensitive and important aspect of contract negotiations for wholly foreign owned entities ("WOFE") and cooperative joint ventures ("CJV").
I. Choice of Arbitration Tribunal
Contracts in which one party is a foreign entity will contain foreign elements, allowing the parties to choose their jurisdiction without restriction under PRC law. The parties to such a contract may decide at their discretion whether to choose an arbitration tribunal within China or in another country, or resort to ad hoc arbitration to resolve disputes.
A WOFE or CJV established or to be established by a foreign company in China is generally regarded as a Chinese company under PRC law. Therefore, under PRC law, the contracts for the transactions carried out by a WOFE or CJV do not involve any foreign elements. If the contracting parties in a transaction between PRC entities choose a foreign arbitration tribunal, Chinese courts may hold the arbitration clauses in the contract void on the basis that the parties intend to elude PRC law. Therefore, it is recommended that a WOFE or CJV shall appoint a Chinese arbitration tribunal in contracts which do not contain a foreign element.
II. Choice of Arbitration Rules
In most cases, a WOFE or CJV actually appoint a PRC arbitration tribunal (often China International Economic and Trade Arbitration Commission, "CIETAC") for dispute resolution to comply with PRC law's and courts' preference for domestic arbitration tribunals for domestic companies. However, since WOFEs and CJVs may not be familiar with China's arbitration system, they will often include in the dispute resolution clause of contracts a qualification requiring application of non-Chinese arbitration rules, e.g. United Nations Commission on International Trade Law rules ("UNCITRAL Rules"), under the CIETAC arbitration procedures.
A. Feasibility and Risks of UNCITRAL Rules
Although the arbitration rules of CIETAC ("CIETAC Rules") empower the parties to choose other arbitration rules for application in CIETAC arbitration proceedings (1), cases that actually apply UNCITRAL Rules to CIETAC procedures are rare. Irreconcilable discrepancies exist between the procedural administration systems of UNCITRAL and that of CIETAC, such as in the requirements for appointing an authority to appoint the arbitrators. Often, the parties are required to renegotiate and switch to CIETAC Rules during arbitration proceedings due to the conflict of the UNCITRAL Rules and the CIETAC procedural administration systems. Switching rules mid-arbitration exposes the parties to the risks of delayed or suspended proceedings because of the potential for respondent's failure to cooperate. Also, after the arbitration proceedings are completed, the respondent may petition the court to revoke the arbitration award on the basis that the arbitration proceedings are questionable.
B. A Comparison of UNCITRAL Rules and CIETAC Rules
Beyond the risks associated with mid-arbitration re-negotiations for applicable rules, a foreign company or its WOFE or CJV, as the claimant, is generally disadvantaged under the UNCITRAL Rules for other reasons, also.
a. Procedure Efficiency
The claimant's best interests lie in an efficient and speedy conclusion of the arbitration proceedings. However, UNCITRAL Rules are relatively lenient with the time limits for procedures and provide no time limit on the rendering of an award, including the final or supplementary award or corrections to an award. CIETAC Rules expressly set forth that an award shall be rendered within six months (four months for domestic arbitration proceedings) from the date of the formation of the arbitration tribunal.
Under UNCITRAL Rules, an arbitration proceeding starts once the claimant submits and delivers the arbitration notice to the respondent. The authorized arbitration tribunal may decide at its discretion on the time limit of submission of the Application for Arbitration, defense and counterclaim. However, UNCITRAL Rules are silent on the time limit for the submission of counterclaims by the defense. Under CIETAC Rules, the time limit to submit an Application for Arbitration, defense and counterclaim is 45 days and for submitting counterclaims by the defense is 30 days. For a domestic arbitration proceeding, both time limits are 20 days.
Constitution of Arbitration Tribunal
The procedures of appointing arbitrators provided by UNCITRAL are quite complicated. In general, with UNCITRAL Rules, the appointment process for a sole arbitrator requires approximately three months and for three arbitrators requires approximately five months. This appointment process does not include the time required to determine the appointing authority. The complexity and uncertainty associated with UNCITRAL Rules are likely to result in delays of the arbitration proceedings. Under CIETAC Rules, the appointment process for a sole arbitrator requires approximately 15 days and for three arbitrators requires approximately 30 days (excluding the process of arbitrator appointment by the Chairman of CIETAC).
Duration of the Complete Arbitration Proceedings
Under UNCITRAL Rules summary procedures are not an option. But under the CIETAC Rules an award can be rendered within three months through summary procedures.
Through the above analysis, it is obvious that the application of UNCITRAL Rules does not favor the claimant's desire to accelerate the arbitration process. In fact, UNCITRAL Rules are likely to provide the respondent opportunities to delay the procedures since UNCITRAL's procedures are complex and allow for extended time limits.
b. Responsibilities of the Parties
Since UNCITRAL Rules were not intended for a specific arbitration tribunal and can also be applied to other entities (2) , they lack an administrative mechanism. This lack creates an administrative gap when UCITRAL Rules are applied to CIETAC, which must be filled by the parties. For example, the parties are responsible for compliance with various statute of limits and procedural matters (including but not limited to appointing representatives and personnel for assistance, raising objection to the arbitrator, requesting for the witness to appear at court, requiring the arbitration tribunal to make explanations or corrections to an awards rendered) and must ensure the documents (including but not limited to the arbitration notice, application for arbitration and defense) are delivered to the counterparty. If the parties are not experts in administering arbitration proceedings, they risk some fault that may be used by the counterparty as a ground for refusal of the enforcement the award. For this reason, the parties should be very careful about such risks.
Under UNCITRAL Rules, the parties have less discretion and less flexibility than under CIETAC Rules. For instance, with CIETAC Rules the president of the arbitration tribunal is appointed through negotiation among the parties. However, under UNCITRAL Rules, the president of the arbitration tribunal shall be appointed by two arbitrators or the appointing authority. Another example is CIETAC Rules protection of the compromise process during the conciliation proceedings from reference in the hearing proceedings, a protection that is not available in UNCITRAL Rules. Also, CIETAC Rules allow the parties to prepare document translations independently, while UNCITRAL Rules require document translations to be arranged exclusively through the arbitration tribunal.
d. Coordination with PRC Law
Some of UNCITRAL Rules are in conflict with PRC law. Therefore, rulings rendered based upon such rules may not be feasible legally in China. For example, UNCITRAL Rules empower the arbitrational tribunal to take interim measures of protection on the subject matter of the dispute. But, in China, such power is exclusively exercised by the Chinese courts.
C. Custom Tailored Exceptions to CIETAC Rules
For all of the reasons stated, it is unnecessary for a WOFE or CJV to replace CIETAC Rules with other rules. Choosing CIETAC Rules are helpful to manage the uncertainty associated with other rules and to lower the risks of revocation of the final award. In addition, a WOFE or CJV may alter the arbitration rules under the arbitration clauses or make special clauses to the extent that CIETAC Rules permit to better protect the parties' legitimate rights and interests. The parties may include the following alternative clauses in their contract:
- English is the language to be used in the proceedings;
- The parties may appoint a non-CIETAC arbitrator onto the Panel of Arbitrators (3);
- The grounds on which an arbitrator shall withdraw from a hearing shall include inability or failure of arbitrator to perform responsibilities;
- The arbitration tribunal shall hear the case through inquiry or argument and make arrangements for a record of hearing; and
- The expert that the arbitration tribunal consults within China or the expert witness that the arbitration tribunal appoints shall not be an interested party to the case.
However, the special arrangements for or tailored clauses providing exceptions to CIETAC Rules are not accepted where such arrangements or clauses cannot be implemented or are in conflict with the laws of the jurisdiction of arbitration. Although the parties are allowed to tailor CIETAC Rules to cater for their specific transaction, most of the rules do not need to be altered and, in practice, no additional arrangements need to be made.
To minimize a delay in the arbitration process arising from the conflict in arbitration rules and arbitration procedures administration systems and the uncertainty in the result of arbitration, it is recommended that a WOFE or CJV should appoint a PRC arbitration tribunal in the dispute resolution clauses in a contract without foreign elements. Also, a WOFE or CJV may also make changes or additional arrangements to the existing applicable arbitration rules to better utilize the administration procedure function and procedural guidance by arbitration tribunals and better protect their legal rights and interests as the respondent.
1. Article 4 Paragraph 2 of the CIETAC Rules provides that "...the parties may execute such agreement where the parties agree to adopt other arbitration rules or change the corresponding clauses of this Rules, unless such agreement cannot be executed or is in conflict with mandatory regulations of the place of arbitration."
2. The UNCITRAL Rules also apply to ad hoc arbitration.
3. The parties may appoint any person they trust or with certain industry background or professional knowledge as arbitrator.
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.