China: Arbitral procedure and med-arb from English and Chinese eyes

Last Updated: 19 March 2012

By Matthew Townsend and James Rogers

This article was first published in the Global Arbitration Review online news, 12th December 2011

English and Chinese perspectives on international arbitration was the theme of a recent event co-hosted in Beijing by the China Britain Law Institute, or CBLI, and the Bar Council of England and Wales. CBLI co-founder Matthew Townsend and his colleague James Rogers, both of Fulbright & Jaworski's Beijing and Hong Kong offices, report.

Arbitration procedure and culture

Western businesses can be wary of arbitrating in mainland China. Sometimes this trepidation is justified, and sometimes less so. Nevertheless, it is a fact of commercial life that, through the effect of domestic legislation and the bargaining power of Chinese parties to China-related international commercial contracts, international disputes are often settled by arbitration in the PRC.

In these circumstances foreign parties may negotiate extra provisions into their arbitration clauses to mitigate some of the perceived shortcomings of arbitration administered by mainland China arbitral institutions such as CIETAC or the Beijing Arbitration Commission. For example, parties can modify arbitration clauses so that the arbitration be heard in English (the default under the current CIETAC rules is Chinese) and that proceedings include document production (not envisaged in the CIETAC rules) and entail an adversarial procedure with a greater role for cross-examination of witnesses (CIETAC arbitrations tend to be short-form, document-focused and tribunal- rather than party-driven).

However, as panellist James Rowland, a consultant at King & Wood's Beijing office, noted, "certain modifications to make the foreign side comfortable might give the Chinese side a feeling of unfairness."

This could be the case where, for example, the PRC side is required to present its case through translators in English-language proceedings. Elsewhere it was noted that Chinese parties to English-language proceedings may feel disadvantaged by an adversarial procedure rather than an inquisitorial procedure led by the tribunal. They may also be unfamiliar with concepts, like document production, that are not part of the Chinese legal tradition. These preferences were reflected by the Chinese lawyers on the panel who indicated conditional support for what they call the "no-nonsense" and cost-effective procedure traditionally employed by the Chinese arbitration institutions.

CIETAC rule changes

Wang Jie, director of CIETAC's international case department, noted that forthcoming rule changes (anticipated to become effective on 1 March 2012) will contain measures intended to internationalise CIETAC's provisions by enhancing its ability to award interim measures, as well as increasing the flexibility of the parties and CIETAC with respect to specifying the forum and language of proceedings and the appointment of arbitrators.

Significantly the new rules are expected to confirm CIETAC's ability to conduct arbitrations outside mainland China and Hong Kong, given the striking out of wording contained in article 1 of the current rules that "[t]hese Rules are formulated in accordance with the Arbitration Law of the People's Republic of China" and other forthcoming changes. This raises the possibility that Chinese companies will take CIETAC arbitration offshore from the PRC as they continue to invest abroad.

Arbitration as a means to resolve China-related joint venture disputes

Steven Thompson of XXIV Old Buildings in London and Li Qing, a partner at Jun He in Beijing, each gave presentations on the merits of commercial arbitration in resolving foreign-related joint venture disputes in the PRC. Chief among these were flexibility of procedure and the freedom to appoint suitable arbitrators, as well as the enforcement advantages conferred by the New York Convention. Thompson also considered "the thorny issue of disputes involving third parties and/or non-signatories to arbitration agreements".

There was some discussion of the well-reported Wahaha/Danone arbitration, concerning a trademark dispute following a joint venture between a French and a Chinese entity, which emphasised the importance of choice of jurisdiction and forum in China-related joint venture contracts. Rowland explained that, in his experience, it was not unusual to see a joint venture contract specifying one arbitration forum, while those contracts entered into by the joint venture vehicle pointed to another, and earlier 'framework' agreements between the parties nominated a third. Li Qing noted that, in the Wahaha case, the parties went to arbitration in Beijing under the CIETAC rules, in Hangzhou under the rules of the Hangzhou Arbitration Commission and in Stockholm under the SCC rules, while multiple litigation proceedings were also commenced.

Conciliation in arbitration proceedings

The CIETAC rules, in common with the new Hong Kong arbitration ordinance, allow for the possibility that the arbitrator act as mediator in the course of arbitral proceedings. This kind of "med-arb" provision continues to provoke debate among practitioners.

One case mentioned in both panels was Gao Haiyan v Keeneye Holdings Ltd, in which the Hong Kong Court of First Instance refused to enforce an award made by the Xian Arbitration Commission (XAC) in which a mixed med-arb procedure had taken place. The judgment, which has since been reversed on appeal by the Hong Kong Court of Appeal, held that an apparent bias arose from the mediation that made enforcement of the award contrary to public policy in Hong Kong.

In Gao Haiyan, the chairman of the XAC and one of the panel of three arbitrators contacted a third party who had not been involved in the arbitration but who was perceived as having influence over the respondent. This third party was instructed to "work on" the respondent in order to encourage him to accept a settlement proposal suggested by the tribunal in the conciliation proceedings. At no point during this "mediation" were both parties (or even the full tribunal) present.

In reversing the Hong Kong Court of First Instance's judgment, the Court of Appeal indicated that future arbitral awards reached through a med-arb process may well be enforceable in Hong Kong. In reaching this decision the Court of Appeal emphasised the importance of context. The fact that a particular med-arb process might cause an appearance of bias if adopted in Hong Kong did not necessarily mean that the resulting award should be refused enforcement in Hong Kong, particularly when the award was rendered in a jurisdiction (and, in this case, upheld by the courts in that jurisdiction) where the med-arb procedure in question was not uncommon.

Nevertheless, on the med-arb point, Stuart Adair of XXIV Old Buildings sounded a warning note that there was, in general, "an uneasy tension between the formal judicial function of an arbitrator and the informal role of a mediator" that would always potentially jeopardise the successful enforcement of an award where med-arb is undertaken.

However, Wang Jie of CIETAC pointed out that although med-arb was frequently used in CIETAC arbitration proceedings, to date, no CIETAC award had been set aside due to actual or perceived bias.

Arbitration and the China-Africa axis

Phillip Aliker, of Tanfield Chambers in London, discussed the relevance of English law on Sino-African trade. With a geographical correlation across the region between those countries that are former British colonies and those that are high-value recipients of Chinese foreign direct investment this is a clear and persistent relationship. Even following independence, the English Arbitration Act 1996 and its variations to the UNCITRAL Model Law has inspired legislation in Mauritius, Kenya, Ghana and elsewhere.

It would appear, therefore, that, despite the growth of China-related China-seated arbitration, English law still has a significant role to play, both as the governing law of many international contracts and by its influence in shaping the law in many other parts of the world, including Africa.

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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