China: International Arbitration outside of the PRC: Explaining to Chinese enterprises why they need us

Last Updated: 21 January 2015
Article by Paul Starr

Over the last several years, Chinese companies have been extending their reach around the globe, undertaking ever-increasing pioneering projects in infrastructure, energy, commerce, environment and other developments.

As they do so, we see a growing number of multi-million dollar disputes arising from their overseas businesses and claims incurred by their overseas counterparts. The legal risks to which Chinese companies are exposed have therefore been increasing. Some of them, rather unwittingly, develop a habit of turning to local lawyers in the dispute countries ("Country Lawyers") for major dispute resolution solutions. That is very inadvisable.

What these Chinese companies are not aware of is the fact that good lawyers are very rarely relocated to regions like the Middle East or Africa by their law firms, but rather situated mostly in major countries such as China. Rather than directly instructing Country Lawyers to advise them on how best their disputes should be handled, Chinese companies should make a wiser decision by engaging a combination of PRC expertise plus international dispute resolution advisors from China, including Hong Kong ("International DR Advisors") to advise them on their complex overseas claims.

We set out below some tips on what Chinese corporate clients should best be advised when faced with the dilemma of overseas claims and disputes.

Tip No. 1 – Always appoint an international dispute resolution lawyer to co-counsel with the PRC lawyer

In other words, advise PRC clients not to directly use Country Lawyers or local offices of international law firms in the overseas jurisdiction where project is situated.

We appreciate that some clients may be reluctant to instructing International DR Advisors to deal with their cross-border disputes, as doing so means having to pay for two sets of legal fees, and budgetary constraints are normally a dominating consideration in every decision made by every company.

However, while there will be some overlap, the International DR Advisors and the PRC Lawyers can and in fact do play distinct roles in a dispute resolution process, and extra value can be added by the International DR Advisors, whose role are to make sure that the cross-border dispute is properly managed, minimizing the legal risks their clients are exposed to. International Dispute Advisors:

  1. have the necessary specialist knowledge to handle complex contractual disputes
    • for example, construction, regulatory, international trade or maritime disputes normally call for a good command of knowledge about the relevant industry. International DR Advisors will have dispute resolution lawyers dedicated to different sectors with the specific specialist knowledge necessary for dealing with different complex contractual disputes. This will be particularly useful where the original documents, e.g. contract giving rise to the dispute, were prepared by international law firms.
  1. help PRC law firms to manage the Country Lawyers
    • Because Country Lawyers come from jurisdictions that may have very different legal systems and cultures from each other, International DR Advisors can review and vet the work done by the Country Lawyers, or alternatively, prepare the formal documentation and the Country Lawyers can localise it. This arrangement can ensure consistency of quality of legal service and strategy implementation across all relevant jurisdictions and throughout the course of the disputes.

International DR Advisors are well familiar with what potential problems are commonly encountered in international arbitration, unlike many Country Lawyers, and will take them into account when formulating a strategy with the PRC lawyers for dealing with clients' disputes. These issues mainly include:

  1. certainty of enforcement of arbitral awards in the opponent's country;
  2. likelihood of delay in enforcement;
  3. how local laws will interfere with the arbitrations;
  4. whether the interference will have a positive or negative impact on the arbitrations; and
  5. matters of custom and practice.

One example of the good side of a local court's interference is that if the seat of arbitration has a good reputation for making orders to prevent a party from transferring assets to avoid enforcement, the International DR Advisors may take advantage of it by advising clients of PRC law firms to go to the local court to obtain an injunction if necessary, rather than to look to the arbitral tribunal for an order not to transfer the assets. On the other hand, the local courts may interfere with the arbitrations in a harmful way, e.g. some courts may interfere with the appointment of the arbitrators to play for time to the benefit of one party. International DR Advisors have the strategic expertise to assist with all of this.

  1. Act as a bridge and minimising "lost in translation"
    • In international arbitrations, there is usually an important bridge to build with the arbitrators and the arbitration commission. International DR Advisors are very well placed to act as such a bridge, and help PRC based law firms and their clients to better understand what the arbitrators or the commission want during the course of arbitrations. Many of us know the arbitrators personally as well.

In one of our large-scale arbitration cases, we were consulted by one of our Chinese clients over USD200 million worth of claims in the Middle East. They had previously engaged the local Middle Eastern branch of a well-known UK law firm and then contacted us because they did not feel comfortable about the advice they had received. When they told us the name of this Middle Eastern based international lawyer they had engaged, it turned out that we knew him, and he was a young man who had been based in Hong Kong for a couple of years, and he had only moved to the Middle East then for just a couple of months. Moreover, the reason why he had left Hong Kong is because his law practice was not very successful and his department had closed!

Tip No. 2 – International DR Advisors can help to choose the arbitral tribunal very carefully.

Key to success in any arbitration is very often the appointment of the arbitral tribunal. Should lawyers be appointed, technicians, or a combination of each? Does the legal team personally know the future arbitrators?

The arbitration clause may provide that each side is allowed to appoint a candidate for the arbitrator, and the arbitration commission will adjudicate on the appointment of the arbitrator(s) if the parties cannot agree on the choice of arbitrator. The two arbitrators will then appoint a chairman.

In a high value construction arbitration we did on the Taiwan High Speed Rail project, we managed to secure the appointment of all three members of the arbitration tribunal as being international arbitrators, which one way or the other, helped our client succeed in achieving a favourable outcome. We would say it helped both parties. Many people told us at the time that we would never be able to persuade the Taiwanese party to appoint non-nationals. We did. We achieved the same success in appointment in Dubai.

In addition, certain protocols allow lawyers actually to interview arbitrators before they are appointed, and at a second stage before they select a Chairman. One should bear in mind that those protocols have to be very strictly agreed with the other side and the potential arbitrator – in which International DR Advisors will play an important policing role.

Tip No. 3 – International Dispute Advisors are skilled at drawing up a proper protocol for handling international arbitrations.

Clients involved in international arbitrations are always concerned about the length and cost of the arbitration process.

Therefore, it is important to take full advantage of the flexibility inherent in international arbitrations to achieve an efficient and hence costs effective arbitration process.

By taking into account of factors such as: (1) the amount of money in dispute; (2) complexity of the issues involved; and (3) the financial position of the client, International DR Advisors work with PRC lawyers to develop specific procedures that will generally make their client's arbitration more efficient and hence cost effective.

In each of our international arbitration cases, we tailor specific protocols that are warranted for that case to improve the efficiency in the particular arbitration process. We set out the main common features of our protocols below for your information.

At the initial stage of arbitration, we will:

  • consider carefully the tribunal's availability (in terms of their ability to devote the time to the pre-hearing stages of the arbitral process, their availability to attend the merits hearing and their capacity to render a timely award) and their expertise for deciding the particular dispute in question;
  • recommend a costs protocol be agreed between the parties at the very start of the arbitration, with the aim to set out some basic rules relating costs (such as the costs following the event) so that our clients will know where they stand before they embark too far along the process;
  • investigate with client's opponents the possibility of agreeing on a cap on recoverable costs so as to again let our clients know what is involved with regard to costs at the earliest time; and
  • work with the opponent to appoint a sole arbitrator where the dispute appears to be small, or where issues do not need the analysis of three arbitrators.

As the arbitration progresses, we will:

  • request that the arbitral tribunal convene a very early procedural meeting to establish the procedures and timelines of the whole arbitration and, in particular, setting the date for the merits hearing (in order to ensure availability of all parties and the tribunal to attend the hearing at a date as early as practicably possible);
  • at the stage of the early procedural meeting, address the most appropriate location for the oral hearing in terms of convenience and cost (rather than defaulting to the seat of arbitration);
  • explore with the arbitral tribunal and the opponents the possibility of expert teaming, expert conferencing, and adopting the latest version of the IBA Rules on the Taking of Evidence in International Commercial Arbitration;
  • request and, if possible, obtaining a commitment from the arbitral tribunal at the outset of the proceedings that the award will be issued within a reasonable time;
  • consider whether it is appropriate for the dispute to be dealt with by a "documents only" arbitral process, obviating the expense and delay involved in the conduct of oral hearings;
  • encourage consolidation and joinder of parties and disputes where appropriate;
  • consider whether a "fast track" schedule for the expedited hearing of the dispute is appropriate where the issues in dispute can be dealt with swiftly and/or a prompt resolution of the dispute is of particular importance to the parties; and
  • explore the possibility of a determination of preliminary issues that may lead to a quicker resolution of the dispute.

Before the hearing, we will:

  • identify as soon as possible issues in the arbitration that can be taken ahead of the main hearing the resolution of which would be helpful to settlement and economy;
  • try to limit and focus requests for the discovery of documents, and work with the opponent to determine the most effective means of dealing with electronic documents;
  • encourage experts to meet to identify common views and to pinpoint, with clarity, the points of disagreement; and
  • where appropriate, agree to limit the length of written submissions with a view to saving costs.

At the hearing, we will:

  • consider dividing time during the oral hearing between the parties on a "chess clock" basis to encourage the parties' counsel to manage time efficiently;
  • use videoconferencing for non-local witnesses whose testimony is not expected to be lengthy and/or crucial and considering its use for procedural meetings; and
  • avoid the cost and time involved in multiple witnesses testifying about the same facts.

Tip No. 4 – Awareness of cultural sensitivities

In resolving international disputes, it has always been important for clients to know the cultures of the overseas entities they are dealing with, and the cultural and political context of the particular seat of arbitration. International DR Advisors can help PRC lawyers to better understand their overseas "opponent", including:

  • The opponent's way of doing business and dealing with disputes;
  • The opponent's way of thinking, and the factors affecting their thought;
  • The opponent's cultural habit of negotiation; and
  • Any bureaucratic procedures that client may encounter locally.

We have a recent example in the Middle East. The PRC client tried to settle a large claim without success. We decided to time some preliminary issues in an arbitration to conclude before Ramadan, the Holy Month (where, similar to Chinese New Year, Arabic entities prefer to conclude settlements). Working with our PRC law firm colleagues, we won 5 out of 6 of the preliminary issues. Sure enough, the Dubai entity offered settlement just before Ramadan.

Tip No. 5 – Think carefully before instructing a Queen's Counsel ("QC")

Sometimes, Chinese companies and PRC law firms get seduced into thinking that they should choose a London QC to help conduct cross-border commercial disputes, and not International law firms – This is a mistake. A QC is not trained to deal with clients and client matters. They are trained to talk to the Judge or the Arbitrator – not the client. He or she is not trained to take witness statements, nor deal with experts or documentary disclosure. Their main training is to carry out the advocacy and cross-examination at the hearing.

We saw recently a case where a foreign party tried only to use Country Lawyers and a QC. It was a disaster. Their case slowed up. It was not prepared in a strategic way.

Tip No. 6 – Explore routes to settlement and only settle from a position of strength.

Some clients may worry that proposing a settlement negotiation is a sign of weakness. In fact, taking a hard line in settlement negotiations can undermine any such impression, so attempting settlement should always be considered as one of clients' options for resolving international disputes. International DR Advisors have the capability to work with PRC lawyers jointly to advise on how to properly do so.

The natural tendency of clients is to rush in and initiate settlement at the very beginning. But what they have missed in doing so is the importance of settling from a position of strength.

We handled a huge petrochemical dispute in Shenzhen, together with a PRC law firm. The client naturally wanted to settle by making the most sweeping concessions very early on in the battle. It was difficult for us to persuade our own client to hold off and maintain a position of toughness for a period long enough to allow the opponent to see that we were serious in our intentions. Although the private aspirations of our client were not that ambitious – as one often finds with many commercially minded entities – we did not convey that to the other side.

The above strategy paid off, in the sense that the PRC lawyers and ourselves settled this huge case for an amount above our client's modest expectations and more importantly before any arbitration hearing had taken place. Timing is therefore everything.

PRC law firms should instruct International DR Advisors to work together so as to investigate routes to settlement, which include:

  1. Proposing formal mediation – appropriate time should be picked to propose mediation, e.g. at the outset of the case, or after an exchange of submissions has clarified the issues, or after the arbitral tribunal has provided its preliminary views. In choosing a mediator, clients should look for someone with knowledge not only of law but also of the industry and the cultures involved. If you select the right mediator, mediation can be useful.
  2. Making settlement offers – where applicable law permits, clients' international dispute advisors will consider making a "without prejudice save as to costs" settlement offer at an early stage. This will put pressure on the opponent to consider the outcomes of arbitrations seriously and protect clients' cost position.

Over the course of arbitrations, PRC firms and International DR Advisers should investigate into the opponents' pressure points, analyse any change in circumstances, and where necessary, make appropriate adjustments to their strategies as the arbitration progress. It will be useful for the purpose of seeking settlement, to know:

  • What the opponent's short and long term business plans are;
  • Whether there is any restructuring or M&A activities within the opponent's group;
  • Whether there is a change in management of the opponent; and
  • Whether the opponents are involved in any major business disputes or litigation.

Your clients should seek International Dispute Advisors' advice on how to assess the opponents and the changes, and what impacts would they have on the chance of settlement and the overall strategy plan.

Conclusion

Disputes resolution is a War. It needs careful strategy. The army needs careful composition – PRC lawyers plus International Disputes Advisors plus the Country Lawyers. Without that army, the strategy plan is highly likely to mis-fire.

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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