This is part II of Dr. Clarisse von Wunschheim’s series of guest posts on China arbitration. I asked Dr. von Wunschheim to write this series because arbitration is of such crucial importance to so many China transactions and she literally wrote the book on China arbitration: Enforcement of Commercial Arbitral Awards in China.

More from Dr. Von Wunschheim:

PART 2:         Pros & Cons of Arbitration Inside and Outside China

In my previous post, I tried to establish that though the question of whether to arbitrate in or outside China may seem to be primarily relevant for so-called ‘foreign-related’ contracts, it actually concerns all kinds of China-related contracts.  Today’s post aims to determine the main pros and cons of each option, as well as the current trends which they give rise to.

Referring to the arguments most often invoked by the supporters of each option, the main pros and cons can be summarized as follows:

ARBITRATION OUTSIDE CHINA

PROs

CONs

–         Neutrality of the forum, and thereby better assurance of independence of the arbitrators and the arbitration institutions

–         Higher level of professionalism, ethical standards and competence of international arbitrators

–         Increased flexibility and party autonomy, especially with regard to (i) choice of the arbitrators and (ii) conduct of the proceedings

–         Expensive

–         Slow

–         Complicated

–         Lack of availability of interim measures for protection

–         Difficult enforcement of foreign awards in China

–         Western Bias against Chinese companies

 

ARBITRATION IN CHINA

PROs

CONs

–         Faster

–         Cheaper

–         Some availability of interim measures for protection

–         Easier enforcement

 

–         Lack of independence of the arbitrators and/or the arbitration institution

–         Limited party autonomy regarding selection of arbitrators and design of the arbitration proceedings

–         Lack of professionalism among arbitrators

–         Restrictions regarding representation by foreign lawyers

–         Lower ethical standards of lawyers and arbitrators

–         Complicated

 

Though the above lists give a good overview of the most common ‘selling points’ of each option, they do not distinguish:

(i)            the weight of each individual pro or con compared to the others;

(ii)          what makes the difference at the end of the day, the pros of the chosen option or the cons of the opposite option.

With regard to the individual weight of each pro or con, this can be quite different if looking at the problem from the perspective of a Chinese company/lawyer or from the perspective of the foreign company/lawyer.

  • With regard to the position of Chinese lawyers/companies, most of them seem to favor arbitration in China for thefollowing main reasons:
    • They believe arbitration outside China is too expensive, takes too much time and is too complicated;
    • They believe Western arbitrators and arbitration institutions are biased against Chinese companies;
    • The Chinese arbitration system works just fine.

While there is merit in some of these arguments, I also think that they are partly misplaced:

–            Regarding the costs: There is no doubt that arbitration according to international standards and with the involvement of international specialists is generally more expensive than arbitration in China under a local arbitration commission and with local experts. However, there is a reason why, and the list of pros and cons listed above already gives a hint of these reasons. In addition, many companies and especially Chinese companies, misperceive the real cost items and ignore that there are ways to control and limit these costs. They often believe that the main cost item are the fees of the arbitrators and arbitration institution, while it is actually the lawyers’ fees (which are estimated to represent over 80% of the total costs related to an arbitration). They will also often tell you that prices in Geneva, London or Stockholm are far too expensive and they can’t afford to travel there. This argument ignores that the place of hearings does not need to be at the place of arbitration (actually a lot of lawyers ignore that too…). The place of arbitration is a virtual place determining the applicable legal framework to the arbitration, and while they may need to hire lawyers from that region, parties do not need to go there. Hearings can be held in Hong Kong, or even somewhere in China, while the place of arbitration can be anywhere outside China.

–            Regarding the time: It is also true that the deadlines provided in Chinese arbitration rules are usually shorter than in international arbitration rules, and that arbitration proceedings in China usually take less time than in international arbitration proceedings. However, firstly, while speed is good, it is rarely a virtue per se. If it is at the expense of quality it is useless, and even detrimental given the final and binding character of the award. Secondly, let’s not forget that in international arbitrations the parties are the masters of the proceedings, and therefore also of the timeline. In many cases, the problem does not lie with the arbitrators or the rules, but with the parties and their counsel. As busy as famous arbitrators may be, the same is true for high profile arbitration counsel… Here again, there are ways to control this issue, by choosing appropriate arbitrators and counsel. Many arbitration institutions now also provide for fast-track arbitration proceedings.

–            Regarding the argument of ‘complicated’ proceedings, I believe this argument confuses ‘complication’ and flexibility. Chinese arbitration does not provide lawyers and parties with a lot of autonomy, and most things are decided by the arbitrators in a fairly expedited manner. Thus, when Chinese companies and lawyers are involved in international arbitrations, they do not know how to deal with the autonomy given to them and they see that as being ‘complicated’. Due to their lack of exposure to arbitration abroad, many Chinese companies and lawyers do not feel confident in their ability to efficiently conduct such proceedings. And, let’s be honest, no one likes to have to get external help…

–            Regarding the argument of bias against Chinese companies, I believe it is closely linked to the previous argument. It is normal that Chinese parties feel safer at home, the same is true for any party from anywhere. However, this concern has recently been alimented by a survey from CIETAC according to which Chinese companies involved in arbitrations abroad lost in 9 out of 10 cases. Unfortunately, only the result of this survey was published without any information on the reasons for the loss or the methodology or scope of the survey. Thus, while some believe that this survey confirms Western arbitration is tainted by a general bias against China, others (myself included) prefer to explain the figure of 9/10 losses (if at all representative – I am still skeptical about this figure) with the lack of experience and familiarity of Chinese lawyers and companies with international arbitration, which leads them to make the wrong choices. Also, let’s remember that splitting the world into the West vs. China does not really reflect the current world map, be it in terms of geography, economic interests, culture or political power…

In summary, I believe most concerns of Chinese companies and lawyers arise from misperceptions concerning the real functioning of international arbitration. This is understandable to the extent that, except for a handful of mostly big Chinese law firms and their clients, most Chinese lawyers and companies have not yet been exposed to international arbitration.

However, I should also stress that I have noticed in recent years an increased willingness of Chinese companies and lawyers to arbitrate their dispute outside of China, though they often insist on places such as Singapore or Hong Kong. Chinese parties choose these venues because they feel culturally close to them and believe that the risk of a bias against them is limited. From an outsider’s perspective, since these regions having both adopted the UNCITRAL Model Law on International Commercial Arbitration, they are attractive options compared to arbitration in China. However, what the parties often do not realize is that these jurisdictions have common law legal systems, which means that the way that lawyers work and the manner in which the case will be pleaded may be very unfamiliar to them and different from the spirit in which their contracts were drafted. I am thus not sure that this is necessarily the best way to go for Chinese parties, and in particular I am not sure it will help them feel more confident with international arbitration.

  • With regard to the position of foreign lawyers/companies, there is no unanimity and the two schools of thought find supporters. With regard to each of these options, the most common arguments I hear are the following:
    • From supporters of ‘Arbitration outside China’: Arbitration in China is unpredictable. Arbitrators have too much power and the risk of lack of independence and impartiality reduces the chances of fair proceedings;
    • From supporters of ‘Arbitration in China’: Arbitration outside China is not always efficient. After all, winning the arbitration is only half the battle, and enforcing foreign awards in China is more difficult than enforcing Chinese awards.

Again, I remain partly unconvinced by most of these arguments for the following reasons:

–       Regarding the argument of unpredictability of arbitration in China: I agree that arbitration in China is often unpredictable. However I am not sure whether this is really due to the alleged lack of independence and impartiality of the arbitrators or the arbitration institution, as opposed to the general unpredictability of the Chinese legal system. In addition, one cannot deny that international arbitration always shows a certain degree of unpredictability, in particular when the case involves arbitrators from different backgrounds, lawyers and parties from different backgrounds and legal cultures, various laws applicable to various aspects of the dispute, etc.  Who can honestly pretend to be able to predict the outcome?  What must be predictable is the process; arbitration must provide the guarantee of a fair process according to pre-determined rules, and this brings me to the argument of lack of independence or impartiality of the stakeholders.

–       Regarding the argument of lack of independence and impartiality of arbitrators: I have no doubt that this argument is justified in some cases. But this is also true on the international arbitration scene. Let’s not forget that the maxim: ‘the arbitration is only as good as the arbitrator’. In other words, your arbitrator can kill your arbitration, and this is true everywhere, not just in China. While it is true that the choice of arbitrators is more limited in China due to the system of panels of arbitrators, this limitation has been widely relaxed in recent years: Firstly, the current panels of some arbitration commissions, such as BAC or CIETAC, now list many foreign candidates, and secondly, these arbitration commissions now allow the parties to choose arbitrators outside the official panels (with regard to party-appointed arbitrators). In other words, when drafting their arbitration clause, parties have sufficient room to limit risks relating to the background and personality of potential arbitrators.

–        Regarding the argument of enforcement: This is the argument that convinces me the least.

Firstly, why should enforcement of a Chinese arbitration award be easier than enforcement of a foreign award?  While it is true that a Chinese award does not need to be first recognized before being enforced, this recognition phase consists in the review of the existence of grounds for non-recognition/enforcement. Such a review is also applicable to Chinese awards and they are subject to a similar system, though it is not called ‘recognition’.  In addition, I am not sure that the end result of enforcement is more optimistic for Chinese awards than it is for foreign awards.  Most of the difficulties encountered in enforcement proceedings are of a practical nature (finding the defendant, locating the assets, etc.) and apply generally to both types of awards. As to local protectionism or lack of independence of the courts, it can just as easily affect a Chinese award (rendered in favor of a foreign company) as a foreign award. In addition, numbers do not seem to support the theory that Chinese awards are easier to enforce (see a survey conducted by WunschARB)[link no longer exists].

Secondly, even if one was to assume that it is easier to enforce Chinese awards (which I do not believe), this can only be deemed an advantage if the award is the result of a fair process, which meets and corresponds to the parties’ expectations. And in this regard, in view of the cons listed above, many would say that the chances of getting a fair process is more difficult in a Chinese arbitration…

I draw two main conclusions from the above:

  • It seems to me that what makes the difference at the end of the day is often not the pros of the option eventually selected, but rather the cons of the other option.
  • This, together with the lack of persuasiveness of many of the cons, in turn indicates that the way parties choose between arbitration inside or outside China is still largely directed by their fear and ignorance of the other system and is not made in due regard of the specific needs and possibilities of the case at hand. And this will be the topic of my next post.

 

  • MHB

    I am a law student (at least for a few more days) and we were taught arbitration using the terms ‘seat’ for choice of law and ‘location’ or ‘forum’ for choice of where to physically get together.

  • clarisse

    Dear MHB, because international arbitration is so international, terminologies vary from country to country. “Seat” of arbitration is the right technical term, and it is equivalent to “place” of arbitration, which is much more common in practice. “Forum” (at least in civil law countries) has usually a legal (jurisdictional) connotation and is therefore rarely used to designate the place where parties merely get together. In order to designate the place where parties get together, it is best to speak about “place where the hearings will be held” or “place of the hearings”.

  • Twofish

    One thing about business is that your goal is not to negotiate a “fair” contract. Your goal is to negotiate a contract that is “unfair in your favor”. The other side is doing the same thing, and if you have equal bargaining power, usually good things result.
    For SME’s, the arbitration clause often turns out to be not important, because if there is any major dispute that can’t be resolved informally, you’ve likely lost all your money anyway, and the contract is negotiated with that in mind. This matters because even if Chinese companies have misperceptions about the arbitration process, if you are in a situation where the company you are negotiating with 100% insists on having the arbitration happen in China and won’t budge, then you have to consider either giving in or walking away, and in a lot of situations, it doesn’t make sense to walk away since even if you risk losing all your money in arbitration, it’s still worth going ahead.
    Also business people care about the bottom line. If Chinese companies consistently lose in foreign proceedings, most business people don’t care *why*. If it’s because Chinese lawyers don’t know how to operate in international arbitration settings, that’s a valid reason for avoiding them, since business people don’t care *why* they lost their money.
    Wunscheim: However, what the parties often do not realize is that these jurisdictions have common law legal systems, which means that the way that lawyers work and the manner in which the case will be pleaded may be very unfamiliar to them and different from the spirit in which their contracts were drafted.
    I don’t think this is a major negative. Also I think it’s less a cultural issue, than a linguistic one. You aren’t going to have problems finding skilled lawyers in HK or Singapore that can speak Mandarin whereas you are going to have difficulties finding those lawyers in Stockholm.
    Hong Kong has a common law legal system, but by necessity HK lawyers have to deal with PRC issues so that there is a lot of expertise on how the Mainland Chinese legal system works. Conversely, in the area of business law, you have a lot of PRC lawyers and managers that were educated in the United States, so in large companies, you have a lot of familiarity with common law practices. Also, a lot of the newer laws in the PRC have been modeled much more on US law than Continental law, which means that there is pretty deep knowledge in China of how things are done in the United States.
    Also, the “lack of familiarity” issue disappears with HK. Any non-trivial international business in the PRC is going to have to interact with Hong Kong law at some point, and most of those interactions have been extremely positive.

  • Another excellent article. Many of the points could be applied to arbitration in international contracts generally. I can’t wait for the third one.

  • GC

    This whole series has been so valuable. Thanks for bringing in such a top expert to address such an interesting and important issue. Ms. von Wuschheim has chaged my thinking on arbitration clauses.