the council of hong kong professional associations

The Council of Hong Kong The Council of Hong Kong Professional AssociationsProfessional Associations

Arbitration in Mainland of China Arbitration in Mainland of China – A better alternative to resolving – A better alternative to resolving

commercial disputes?commercial disputes?By Christopher To

[email protected]

Outline

• Why use Arbitration

• Key Factors in drafting Arbitration Clauses

• Domestic Arbitration Law and Procedure

• International Arbitration Law and Procedure

• Practical Tips and the Pitfalls

• Enforcement of Arbitration Awards in China

Introduction

Business Disputes

Definition of a Dispute

The New Shorter Oxford English Dictionary 1993 defines it as

“A logical argument” or “An oral or written discussion of a subject in which arguments for

and against are put forward and examined” or “An instance of disputing or arguing against something or

someone, argument, a controversy” or “A heated contention, a disagreement in which opposing views are

strongly held” or “The act of disputing or arguing against something or someone;

controversy, debate” or “A fight, a struggle”

Introduction

Business Disputes (cont’d)

Examples of International Business Disputes

Contracts on sale of goods (including commodities) Distributorship, agency and intermediary contracts Construction, engineering and infrastructure contracts Intellectual property contracts Registration of domain names Joint Venture agreements Maritime contracts ( such as bills of lading, charter parties) Dealings with a pre shipment inspection agency Dealings with customs authorities Documentary Credit arrangements Employment Contracts Where a State or a State owned entity is involved

Introduction

Ways to Resolve Disputes

Arbitration Litigation

Negotiation Mediation

Adjudication

Violence Avoidance

BATNA

• Best

• Alternative

• To a

• Negotiated

• Agreement

WATNA

• Worst

• Alternative

• To a

• Negotiated

• Agreement

Negotiation

• Interests/Priorities

• Options

• Standards

• Constraints

• Alternatives to Agreement

Barriers to Negotiation

• Emotions

• Lack of Information

• Lack of Creativity

• Miscalculation

What a Mediator Can Add to Negotiations• Open communication• Help parties understand interests and priorities• Help generate creative solutions• Help discover mutually acceptable standards• Help parties understand negotiating constraints• Help assess alternatives to agreement• Bring closure• Help attain ratification

Personal Qualities of a Mediator

• Listening skills• Patience• Commonsense• Ability to close• Ability to

summarise• Analytical skills

• Ability to keep confidences

• Ability to recognise the issues

• Lateral thinking• Neutrality• Persuasive ability• Persistence• Creativity

What is Mediation ?

• Mediation is a voluntary, non-binding, private dispute resolution process in which a neutral person helps the Parties try to reach a negotiated settlement.

Why Mediation Works ?• Facilities communication and separates the people from the

problem• Helps overcome deadlock and emotional blockages• Restores the negotiation process• Identifies and focuses on the real issues and needs of the

Parties• Gets the right people and the right information to the table• Helps Parties to reassess their case• Increases the options for resolution• Keeps ownership of the problem and the settlement with the

Parties• Restores and safeguards relationships

Mediation is Not• Mediation is not toothless• Mediation is not just compromise• Mediation is not a bar to litigation or arbitration• Mediation is not what lawyers or managers do ‘all the time’• Mediations is not a waste of time and money if it fails• Mediation is not ‘yet another’ cost to the unfortunate

Parties• Mediation is not a sign of weakness or for ‘wimps’• Mediation need not prevent Parties having their ‘day in

court’• Mediation need not ‘disclose your hand’• Mediation need not be risky• Mediation is not counselling

What are the Main Strengths of Mediations ?• It can take place quickly and often with relatively

little expense in contrast to taking the dispute to a court, to a tribunal or to arbitration.

• It focuses on the parties’ real commercial, emotional and psychological needs and not just on their legal rights.

• It gives the parties an opportunity to participate directly and informally in resolving their own dispute.

What are the Main Strengths of Mediations ? (cont’d)

• It gives the parties control over the process itself and the outcome

• It produces outcomes which are likely to endure because the parties themselves have chosen them.

• It eliminates the conflict and hostility that nearly always accompany the compulsory decision of the dispute by a court, tribunal or arbitrator.

• It can improve understandings between parties with an ongoing relationship.

The Corner-Stones of Mediation

• Confidentiality

• Ownership by the Parties

• Neutrality and impartiality

• Avoiding assumptions

• Respect, empathy and genuineness

The Do’s and Don’ts• Do not make a non-negotiable demand in the joint session

and walk out (or threaten to) if your needs are not met

• Do not insult the opposing lawyer in the joint session

• Do not insult your opposing party

• Prepare

• Bring crucial documents

• Provide legal support

• Bring a businessperson with authority to settle

• Factor in other benefits which may result from a settlement

• Trust the mediator

• Stop, look, and listen

Iron Laws of Mediating

• No one will make a difficult decision if there is any possible way to avoid it.

• All specific dispute have to end sometime.

• No settlement is entered into without some doubt and some trust.

General Issues

1. What is Arbitration ? Flexible, Inexpensive, Confidential, Fair and Final

Features distinguishing a reference to arbitration from other dispute resolution techniques : the presence of a dispute or difference between parties which has

been formulated in some way or another; the dispute of difference has been remitted by the parties to a person

to resolve in such a manner that he is called upon to exercise a judicial function;

where appropriate, the parties must have been provide with the opportunity to present evidence and / or submissions in support of their respective claims in dispute;

the parties have agreed to accept the decision.

Arbitrators are appointed by or on behalf of the parties in disputes and has to decide a dispute that has already arisen. Inquisitorial powers are not normally given to an arbitrator.

Arbitration is conducted in accordance with the terms of the parties’ arbitration agreement, usually found in the provisions of a commercial contract between the parties.

General Issues : 1. What is Arbitration ?

Essential Features of Arbitration

Consensual – arbitration agreement

Party autonomy – e.g Choice of tribunal, manner of case presentation, procedure and powers of the tribunal

Jurisdiction of the tribunal is fixed primarily by the terms of the arbitration agreement and the submission to arbitration

Final and legally binding process

Limited scope for intervention by the courts

General Issues

2. How is the Arbitration Started ?

Disputes governed by arbitration agreements trigger the arbitration process.

Arbitration agreements come in two forms :i. where parties to a contract include a clause in which they agree to resolve any dispute which may arise under the contract by arbitration. This is known as an arbitration clause. Many Hong Kong trades and industries have applicable standard forms of contract with standard arbitration clauses, although parties can tailor clauses to suit their circumstances.

ii. where parties are already in dispute but their contract does not contain an arbitration clause, they may enter into a separate agreement to refer the matter to arbitration. This is known as a submission agreement.

Occasionally disputes are referred to arbitration by a court order or the operation of a statute.

General Issues

2. How is the Arbitration Started ? (cont’d)

“ “ Disputes hereunder shall be Disputes hereunder shall be referred to arbitration, referred to arbitration, to be carried out by arbitrators to be carried out by arbitrators

named by the International Chamber of named by the International Chamber of Commerce in Geneva in Commerce in Geneva in accordance with the accordance with the arbitration procedure set forth in the arbitration procedure set forth in the Civil Code of Venezuela and in Civil Code of Venezuela and in the Civil Code of France, with the Civil Code of France, with due regard to the law due regard to the law

of the place of arbitration. ”of the place of arbitration. ”

General Issues : 2. How is the Arbitration Started ?

The Agreement

INSANE CLAUSES

“(1) Should either party come to feel that the Arbitrator is insane or for reasons it comes to know after commencement of the arbitration, it may consult with the other party, and should both parties agree that the Arbitrator is likely to be insane, they shall serve a notice of doubt on the Arbitrator. “Causes giving rise to a notice of doubt” must be extreme and not be limited to continuous making of senseless remarks, absentmindedness and queer conduct such as dancing alone in the public without cause, and the parties may serve a notice of doubt only once during the arbitration.


The Agreement (cont’d)

INSANE CLAUSES (2) On such notice of doubt being served the Arbitrator may

not refuse medical examination by a psychiatrist specialist at one of the hospitals listed in Appendix 1 appended to and made a part hereof.

(3) If in the opinion of the psychiatrist specialist the examination would require more than four weeks or if the psychiatrist specialist is unable to conclude that the Arbitrator is positively insane, then the Arbitrator shall be deemed to be not insane. The medical examination shall be at the parties’ cost and shall be conducted under the condition that the result will be made known only to the Arbitrator and the parties.



INSANE CLAUSES

(4) If the Arbitrator is found insane, he shall resign in which event he shall not be entitled to the fee for the services he will have rendered, but each party shall pay to the Arbitrator a get well fee of Yen 100,000 and one-half of the disbursements covering the amount the Arbitrator will have expended in connection with the arbitration. If the Arbitrator is found not insane as the result of the examination, the parties shall jointly provide him with a letter of apology and each party shall pay a so-sorry fee of Yen 1,000,000 to the Arbitrator which he may treat as damages for tax purposes. The arbitrator, however, may not count the time spent for the medical examination as time spent for arbitration.



INSANE CLAUSES

(5) While the provisions of these clauses are not intended to permit the parties to take the arbitrator to the hospital by dint of force, it does not bar the parties from initiating judicial proceedings for removal of the arbitrator.Such proceedings may be resorted to only where the arbitrator refuses to subject himself to medical examination or where the parties are not satisfied with the findings of the psychiatrist that the arbitrator is not insane. If the parties initiate judicial proceedings and fail to remove the arbitrator, each party shall pay a nuisance-fee of Yen 2,000,000 to the arbitrator. During such proceedings, the arbitrator may proceed, but the arbitrator may not render an award. If rendered, such award may not be enforced.”



MAGIC FORMULA

“ Any dispute, controversy, or claim arising out of or in connection with this contract, including any question regarding its existence, validity, or termination shall be finally resolved by arbitration under the Rules of [rules/institution].

The tribunal shall consist of [a sole/three] arbitrator(s).

The place of arbitration shall be [city]. ”



OTHER USEFUL POINTS

Language Expertise and special requirements of

arbitrators Discovery Multi party proceedings Costs Confidentiality Med-arb, ADR Sovereign immunity waiver

Points to Consider when Drafting an Arbitration Clause

Agreement to ArbitrateAgreement to Arbitrate

Require Negotiation, Mediation and Conciliation?

If so, Fix Time Limit

Points to Consider when Drafting an Arbitration Clause (cont’d)

Select RulesSelect Rules

Ad Hoc Institutional

UNCITRAL

Centre for Public

Resources

No Rules

Name appointing Authority (“AA”)

Other

LCIA

ICSID

ICC

AAA

Int’l Arb Rules

Comm Arb Rules

HKIAC


Determine Number of ArbitratorsDetermine Number of Arbitratorsstraight forwardstraight forward

case,case,smaller amountsmaller amount

in disputein dispute

Large amountLarge amountin disputein dispute

1 31

Claimant nominates several from

pre-determined acceptable category; Defendant picks one

Pre-designated list; Defendant picks one

Selection by Institution / AA

Fix time period

Restrictions on choice (i.e. nationality)

Provide that arbitrators shall be independent and

impartial?

Institution / AA selects all 3

Each side picks one

Default: If party fails to appoint Institution / AA

appoints

Fix time period?

Institution / AA selects 3rd

Require consultation with parties?

AAA-style list procedure?

Period for agreement by parties

Requiring meeting

No Rules

Exchange lists of names

Fix time period; if no agreement

Party designated selects 3rd

Fix time period


Select SeatSelect Seat

Factors : NY Convention ratification; Factors : NY Convention ratification; limited mandatory procedural rules; limited mandatory procedural rules;

absence of restrictions on counsel. arbitrators; absence of restrictions on counsel. arbitrators; good facilities; limited judicial interventiongood facilities; limited judicial intervention

Neutral PlaceCity in Defendant’s

Home CountryPlace of Performance

Provide that hearings may be held anywhere arbitrators find convenient?


Choose Governing LawChoose Governing Law

Procedural Law = Seat of Arbitration

Substantive Law

Specify National LawNon Specified “General Principles of International

Law”


Provide Optional Procedural Matters Provide Optional Procedural Matters (Specify on or more)(Specify on or more)

Think about other

possible procedures

(i.e. after

determination of

liability each side submits damages proposed

and arbitrators must pick

one)

Tribunal – Appointed Expert(s)

No Restrictions

Require ability for parties to

cross-examine or to comment

Consolidation

Discovery

Depositions

Arbitrators’ Discretion

Documents

Language

Two, neither dominantTwo, but require translation to

one dominant

Only one

Provide time limits

Provide limits?


Issuance of AwardIssuance of Award

Final award only

No injunctive relief

Injunctive reliefPermit partial

awards

No injunctive relief

Permit court action for injunction to

maintain status quo pending arbitration

Permit arbitrators to issue

injunction

All awards final and binding on partiesAll awards final and binding on parties


All awards final and binding on parties

Permit arbitrators to act as

amicable compositeurs

Permit specific performance

Permit arbitrators to adapt contract

All to winner As arbitrators may determine

Pre-judgment Post-judgment

arbitrators may award costsarbitrators may award costs

award interest ?award interest ?

rate ?rate ?


Provide for judgment currency?

Award may be enforced…

In any court having jurisdiction thereof

Designate specific court and consent to

jurisdiction

Waive sovereign immunity if necessary

Exclude court appeal?

In England & Switzerland: yes

In other countries, optional

Mainland of China

Institutional arbitration widely recognized in the Mainland of China.

More than 180 Chinese arbitral institutions in existence as of 2006.

Article 16 of the Chinese Arbitration Law requires the designation of an “arbitration commission”.

Ad hoc arbitration is not encouraged.

Landscape of Dispute Resolution

Judicial Proceedings/Court Litigation

Alternative Dispute Resolution

(ADR)• Negotiation– Conciliation/Mediation– Expert Determination– Commercial Arbitration– Others

Advantage of Commercial Arbitration

• Party Autonomy

• Expert Adjudication

• Confidentiality

• Finality of Award

• Universal Enforceability

Categories of Commercial Arbitration

Ad Hoc Arbitration• Ad Hoc Arbitration is banned in mainland China.

Institutional Arbitration• Leading International Arbitration Institutions

ICC Court in Paris, LCIA in London, SCC in Stockholm, AAA in New

York, SIAC in Singapore, HKIAC in Hong Kong and CIETAC in China

• More than 200 local arbitration commissions in

Mainland China

Types of Arbitration Proceedings

InstitutionalizedAn institutional arbitration is one which is administered by one of the many specialist arbitral institutions under its own rules of Arbitration.

Ad-hocAd-hoc arbitrations often take place under the provisions of a submission agreement which itself often establishes the arbitral tribunal and sets out the procedural rules upon which the parties have agreed. An ad-hoc arbitration arises under an arbitration clause.

Advantages of Ad Hoc Arbitration

Flexibility – Can be shaped to meet the wishes of the parties and the facts of the particular dispute – Requires complete cooperation of the Disputants.

Saving on administrative costs.

UNCITRAL Arbitration Rules a substitute for the rules of arbitral institutions – offer a low cost and speedy, flexible alternative to institutional arbitration.

Disadvantages of Ad Hoc Arbitration

When an arbitrator refuses to disqualify himself, it usually requires court assistance to obtain his removal. Lengthier procedure if challenge of the arbitrator occurs.

Courts feel less comfortable with ad hoc arbitrations as they feel much more comfortable in confirming institutional awards where there is some assurance that a neutral body has fairly referred both the procedural and substantive controversies which invariably arise during the course of arbitration proceedings.

Difficult to enforce a default award – was due process accorded to the defaulting party?

Care must be afforded to drafting Ad hoc clauses as there is no administering body on hand to point out errors and attempt to fix them.

What if the parties do not cooperate? Too much flexibility could lead to inappropriate procedures being adopted. Are they really cost effective?

Advantages of Institutional Arbitration

Ease of incorporating by reference the institution’s rules in an international contract. Clear set of rules Model clauses stood the test of time

Arbitrator selection – Parties are spared the burden of negotiating a fee for services with their adjudicator – Less embarrassing and difficult situations can occur. In ad hoc arbitrations it is more difficult to monitor arbitrators’ hourly billing also t

here could be cases of abusive arbitrators attempting to re-negotiate fee arrangement to include cancellation indemnity.

Disclosure and Challenge procedures are provided for the institution to remove and replace any arbitrator nominees whose independence is challenged by a party.

Professional Staff available to guide disputants through the arbitration process.

Arbitral institutions have received the increasingly favorable recognition of national courts.

Disadvantages of Institutional Arbitration

Costs are the prime factor. Are they? Arbitrators may prefer ad hoc arbitrations

Can fix their own fees and conditions. Avoid administrative constraints of institutional arbitration

In-house counsels’ belief that ad hoc arbitration provides greater control over the process: “institionalised procedures can become costly and bureaucratic without prop

er oversight and management by the parties.” Earl McLaren Journal of International Arbitration Volume 19 Number 5 (2002) pages 473 to 490.

Some believe that institutions are very bureaucratic and hinder the dispute resolution process.

Confidentiality could be an issue. Arbitrators are remunerated less favorably and they do not put in the

amount of effort compared to an ad hoc arbitration. Some believe that institutions only look after their own interests.

Legal Framework of Arbitration in China

Statutes• Civil Procedural Law (1991, 2007) (“CPL”)• Arbitration Law (1994) (“AL”)

Judicial Interpretations• SPC Interpretation on Several Issues regarding the

Application of the PRC Arbitration Law (2006) (“SPC 2006 Interpretations”)

International Convention• Convention on the Recognition and Enforcement of Foreign

Arbitral Award (“New York Convention”)

Dual System of Arbitration in China [I]

Arbitration in China

Domestic Arbitration (The arbitration without

foreign-related elements)

Foreign-related Arbitration (The arbitration with

foreign-related elements)

Foreign-related elements: (i) either one or both of the parties is a person with foreign nationality or a stateless person, or a company or organization domiciled in a foreign country;

(ii) the subject matter of the dispute is situated in a foreign country; or

(iii) the legal facts that establish, change, or terminate the civil legal relationship between the parties take place in a foreign country.

Dual System of Arbitration in China [II]

Different Treatments of Domestic Arbitration and foreign-related Arbitration under PRC Arbitration Law:– Arbitration Place/Place of Oral Hearing– Arbitration Language– Nationality of Arbitrators– Applicable Law– Judicial Review

• Domestic awards: substantive and procedural review• Foreign-related awards: merely procedural review

Arbitration Agreement: Form

Forms of Arbitration Agreement (AL Art.

16)• Arbitration Clause in the contract; and

• Separate Arbitration Agreement

The Written Form• An arbitration agreement is in writing if it is contained in a tangible

form of a document such as a contract, letter, telegram, telex,

facsmile, EDI or email. (Article 11 of Contract Law, Art. 1 of SPC

Interpretations, and Article 5.3 of CIETAC Rules)

Arbitration Agreement: Validity 1

A valid arbitration agreement should contain the following three particulars: (AL Art. 16)

– an intent to resolve disputes through arbitration;

– express subject matter for arbitration; and

– the designated arbitration institution

Arbitration Agreement: Validity 2

An arbitration agreement is void if one of the following circumstances exists (AL Art. 17) :– the arbitration matter exceeds the

statutory scope of arbitration;

– the arbitration agreement was entered by party/parties without or with limited civil capacity; and

– A party enters into the arbitration agreement under duress.

Arbitration Agreement: Validity 3Valid or Invalid arbitration agreement? (SPC 2006 Interpretations)

• “…arbitration at China International Trade Arbitration Commission”;

• “…arbitration at China Arbitration Association”;

• “…arbitration under the Rules of CIETAC”;

• “…arbitration under UNCITRAL Rules”;

• “…arbitration at CIETAC or AAA”;

• “…arbitration in Shanghai” ;

• “ …arbitration in Xi’an”; and

• “…arbitration at CIETAC or litigation before Chinese court”.

Arbitration Agreement: Arbitrability

The following matters are not arbitrable under PRC Arbitration Law:

– Marital, adoption, guardianship, support and succession disputes (AL Art.3)

– Administrative disputes (AL Art.3)

– Labor disputes (AL Art. 77)

– Disputes arising out of agricultural contractor’s contract (AL Art. 77)

Arbitration Agreement: Severability

Severability of Arbitration Clause (AL Art. 19)

The validity of an arbitration agreement is not affected by the amendment, rescission, termination or invalidity of the underlying contract.

Applicable Law

Law applicable to the substances

Law applicable to the procedure (lex arbitri)

• usually the law of the arbitration place

Law applicable to the validity of arbitration

agreement

• Art. 16 of SPC 2006 Interpretation

Arbitrators

Panel system

Qualifications of arbitrators

– qualifications for domestic arbitrators (AL

Art. 13)

– Qualifications for foreign arbitrators

(including HK, TW and Macao) (AL Art. 67)

Arbitral Tribunal Three-member tribunal or one-member tribunal

Appointment of chief arbitrator/sole arbitrator

Appointment off the panel (CIETAC)

Challenging and replacing an arbitrator• Grounds for challenging: AL Art. 34

• Time limit of challenging: first hearing ~ close of final hearing

• Replacing arbitrator / Re-conduct of arbitration proceedings

Interim Measures Property preservation measures

Evidence preservation measures

Who shall make the decision? Tribunal or Court?

What are the preconditions?– posting of security YES

– urgency NO– irreparable harm NO– probability to overwhelm in merits NO

Evidence

• Rules of Evidence

• Burden of proof

• Tribunal’s option: inquisitorial or adversarial

• Witness

• Expert witness

Arbitral Award

• Time Limits

• Reasoned awards

• Interlocutory award/Partial award

• Consent award

• Dissenting opinions

Judicial Review of Arbitral Award Two regimes:

• Setting aside an award

• Non-enforcement of an award Bifurcated system

• Domestic awards: substantive and procedural review

• Foreign and foreign-related awards: solely procedural review Prior Reporting System

Grounds for Setting-aside or Non-enforcement an Arbitral Award

Foreign awards: Art. V of New York Convention Domestic awards: Art. 213 of Civil Procedural

Law Foreign-related awards: Art. 258 of Civil

Procedural Law HK and Macau awards: Art. 7 of the

Arrangements between mainland and HK/Macao SAR

Taiwan awards: reciprocity

CIETAC Arbitration: Introduction

Establishment in 1954

Headquarters and Sub-commissions

Lianson Offices

CIETAC OrganizationChina International Economic and Trade

Arbitration Commission

Expert Consultation Committee

Case Edition

Committee

Arbitrator Qualification

Review Committee

Special Sectors’

Committee

Research Institute of

CCOTC

SecretariatDomain Name Dispute Resolution

Committee (On line Dispute Resolution Committee)

Secretariat

Registration and

Consultation Division

Domestic Business Division

Foreign Related Business Division

Business Development

Division

Arbitration Supervision

Division

Logistic Affairs

Division

CIETAC Annual Caseload

0

200

400

600

800

1000

1200

1400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Caseload

Categories of CIETAC Cases

• Sale of goods

• Investment disputes (joint ventures)

• Finance

• Construction

• Real Estate

• Securities

• Intellectual property

Typical CIETAC Arbitration Procedure

Stage 1: Filing of the Request for Arbitration

Stage 2: Formation of Arbitral Tribunal

Stage 3: Defense & Counterclaims

Stage 4: Pre-hearing meetings & Preliminary hearings

Stage 5: Hearings

Stage 6: Post-hearing submission

Stage 7: Award

Questions?

THANK YOU!

the council of hong kong professional associations

Documents

tablehelps parties

mediation works

right people

oran instance of disputing

commercial disputes

mainland of china

right information

negotiated settlement