This is part III (the last) of Dr. Clarisse von Wunschheim’s three part series of guest posts on China arbitration. I asked Dr. von Wunschheim to write this series because arbitration is so important 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 3:         Relevant Criteria for Selection between Arbitration in or outside China – Are enforcement issues really so important?  

In my previous posts, I set out the context of the battle between arbitration in or outside China and the arguments that the supporters of each option commonly rely upon. I further explained the reasons why I am not convinced by most these arguments, the main reason being that I believe the pros and cons invoked by the supporters of either option to be largely directed by their fear and ignorance of the other option, and are not made in due regard of the specific needs and possibilities of the case at hand.

The aim of this final post is therefore to determine what should be the relevant criteria when having to decide between arbitration inside or outside China.

First of all, let me go on the record to state that I do not believe in a Manichean view, considering one option as good and the other as evil. Which option is better and why can only be determined based on the specific needs and expectations of the parties to the contract.  On this basis, either option may be the better one.

Therefore, the key questions are: ‘What do the Parties want?’, and then ‘Which option is more likely to give them that ?’

When answering these questions, I believe that we – lawyers – focus too much on enforcement issues. How many times have I heard that ‘arbitration is not efficient if enforcement does not work’? Too many times.

I believe this statement is fundamentally flawed for the following reasons:

  • There are a lot of other positive ‘endings’ to arbitration than enforcement, including:
    • Amicable settlement before rendering of an award, and the related withdrawal of the claim (believed to be around 25% of the cases according to Queen Mary/PWC Survey 2008 and, with regard to China, between 20-30% according to CIETAC and BAC reports [link no longer exists]);
    • Voluntary compliance with the award (believed to be around 50%, according to Queen Mary/PWC [link no longer exists] Survey 2008 , and ‘high’ with regard to China according to CIETAC’s Secretary General);
    • Self-executory awards, i.e. awards in which the winning party’s needs are satisfied with the mere issuing of an award (e.g. full rejection of all claims [representing up to 31% of the cases according to Naimark/Keer Study 2000], award used for insurance purposes, etc.);
    • Post-award settlement (believed to be around 17% according to a survey by Naimark/Keer in 2003); etc.

In most cases, there is thus no need to resort to enforcement. The same seems to apply in China, where less than 10% of the total volume of arbitration cases are believed to result in enforcement proceedings. While, it is undeniable that the possibility of successful enforcement plays a certain role when deciding whether or not to comply with an award or settle, the actual influence of this factor is unknown. I believe that it affects more lawyers than business people, and that’s just as well.

  • There are a lot of other motivations for arbitration proceedings other than recovering money from the opposing party.  Various studies conducted in recent years (e.g. studies made by Richard W. Naimark and Stephanie Keer in 2001 and 2002, Queen Mary/PWC 2008, Queen Mary/White&Case 2010, etc.), reveal that (among other factors such as flexibility, speed, privacy, receipt of a monetary award, arbitrator’s expertise and superiority of the international legal framework, continuing the relationship with the opposing party, etc.) the parties firstly seek a fair and neutral process entitling them to resolve their dispute in a way that is acceptable to both of them. In such cases, it may not be justified to focus mainly on enforcement issues, and it is more important to choose a form of arbitration that will be able to accommodate the parties’ needs and the specificities of the case. Sometimes, the parties just want a decision on a dispute in order to move forward, and the expression of this dispute in monetary terms is more a ‘tool’ rather than an aim in itself. Sometimes, the parties will want a determination of the facts and liability for insurance or other similar purposes. Sometimes, the decision of the arbitrators will allow the parties to create a basis for renegotiation of their business arrangements with regard to future developments not anticipated at the time of conclusion of the contract, etc.

In summary, I believe that the health and efficiency of arbitration, in general, lies firstly in its capacity to lead to a voluntary compliance with arbitral awards or to amicable settlements. If compliance with the award depends on the efficiency of the national enforcement system, then arbitration has in my view already partly failed.  While it is thus certainly important to provide for a well functioning enforcement system, I believe it is even more important to increase the parties’ trust in the system of arbitration.

There is no doubt that there is a lot of work to be done in this respect in China. To trust the international arbitration system, Chinese parties need to be educated about it, and such education can happen through involvement of Chinese parties and companies in international arbitrations, but it can also happen through involvement of foreign arbitration practitioners who bring in their expertise and know how into Chinese arbitrations.  To trust the Chinese arbitration system, foreign parties also need to learn and understand more about it.

At the end of the day, the real challenge is not to decide between arbitration in or outside China. It is to get to a point where international arbitration makes room for the Chinese participants and their cultural specificities, and vice-versa, with Chinese arbitration coming closer to the expectations of international arbitration users.

  • Another excellent article. Please could we have instalment number 4, in which Dr von Wunschheim discusses what steps “international arbitration [should take to] make room for the Chinese participants and their cultural specificities”. Is this simply a matter of education, or are there procedural or other issues that need to be addressed?

  • Avi Young

    Great posts. My thanks to Dr. von Wunshheim for writing such clear and helpful posts and my thanks to Dan for having the good sense to run them. I have learned more about international arbitration from these three posts than I did from the eight hour seminar on international arbitration I attended last year. I too want more.

  • Swees

    These legal pieces are all very well and informative but I miss the banter of Dan’s editorial pices and opinion. Can we get those back please? I think you can see from the conversations how popular they were, this is nice but rather dry and is dealt with anywhay by Lexis Nexis and lectures. We leaern more from Dan’s opinions about China in fact and his and Steves real life experiences there and their clients . More opinions please!!!!

  • MHB

    Echo Mark Anderson’s call for Part 4!
    Thanks Dr. von Wunschheim for replying to my post on a previous instalment.
    You sensibly advocate balancing the pros and the cons in each individual case, and you think the enforcement issue is one of many to be weighed up.
    Predicting Part 4, perhaps, my question is: How do you deal with clients who have the conviction/fear that they are being/will be unjustly shafted – and are therefore focused on taking the toughest line possible? Second, how do you deal with opposition who have such a belief?
    I ask because I imagine this is a common situation faced when presented with a dispute – particularly in China – and that it will be a big barrier to getting both Western and Chinese firms to take up arbitration in greater numbers. When clients arrive with such a frame of mind, I guess that enforcement focused advice will be an easier sell.