Arbitration and Mediation in China: Essential Issues for Ukrainian Business

Oleg V. Gromovoi

China seems to be the main political, economic and trade partner of Ukraine in the Asia-Pacific region. Ukraine and China have achieved great results in economic, political and humanitarian cooperation. Trade turnover between the two countries increased by half in 2006–2008, and exceeded USD 8 billion. The trend of rapid growth in trade turnover was observed in the first 10 months of 2010, and reached USD 1.47 billion. Compared to the same period last year, trade turnover increased by 58%1.

However, it should be noted that in the continuously growing amount of deals and contracts between the contracting parties, there is also a growing amount of disputes. Disputes may be one of the features attributable to trade. As a rule, most disputes arise in international trade where the parties come from different legal and social environments, using different patterns of business behaviour. This should be considered in doing business with Chinese companies as well.

There are several possible ways to resolve a dispute between parties. The common practice of settling a dispute is to sue the opposite party in court. This form of dispute resolution may not be, however, the most preferable option for reaching a settlement in terms of international trade with Chinese companies. One of the explanations of this is that when a dispute arises in relation to a contract with international elements, one party may feel uncomfortable with the legal system in the other party’s domicile. Even more important may be the feeling of being in an inferior position should a dispute be resolved in one of the party’s local court. The problem of language and cultural barriers should be considered as well.

A perceived lack of independent judicial systems, the fear of “home-ground” advantage, the lack of efficiency and expediency in discharging justice and enforcement difficulties in China urge some foreign companies to avoid litigation in national courts.

Other alternatives to litigations include Alternative Dispute Resolution methods (ADR), such as mediation and arbitration.

Mediation is a private process where a neutral third party, called a mediator, helps the parties in question to discuss and try to resolve their dispute. In China, mediation seems to be used more frequently than anywhere else in the world. Mediation for foreign-related disputes with a Chinese element can take several forms including: mediation by court; mediation by the China International Economic and Trade Arbitration Commission (CIETAC); mediation by an institution, such as the Hong Kong Mediation Centre, the China Council for the Promotion of International Trade/Chinese Chamber of International Commerce (CCPIT/CCOIC) Conciliation Centre, etc.

However, the legal effects of a settlement agreement concluded using one of these mediation options are rather different:

— If the settlement agreement between the parties is concluded by mediation of a court (or in a court), it, upon approval by the court, will have the status of a court judgement which cannot be appealed;

— If the settlement, agreement is achieved by mediation of the CIETAC, such agreement upon approval by the CIETAC, will have the status of an arbitral award, which the parties must comply with;

— If the settlement agreement between the parties is concluded with the mediation of such institutions as, for example, the Chinese Chamber of International Commerce Conciliation Centre, it will be deemed to be a new contract. In the event of any failure to perform the settlement agreement, only the violation of the settlement agreement can be a matter for suing.

Mediation in China is on the rise due to the following reasons: 1) mediation reduces the costs of dispute resolution (e.g. by limiting court and legal fees); 2) local courts distinctively support the mediation process; 3) mediation limits formality and complexity of the existing arbitrations and litigations. 4) finally, mediation helps to preserve business relations.

In Hong Kong, parties now have to explore the possibility of mediation before they proceed with litigation under new court rules.

Taking into account the entire range of mediation advantages and its popularity in China, mediation, however, should not be considered as universal and the only applicable method in international dispute resolution. Mediation may be effective if both arguing parties are eager to resolve dispute amicably. But should the parties fail to reach an amicable solution and one of them seeks to be a “winner” in a dispute, then the mediation is doomed to fail. Moreover, mediation itself is not an enforcement mechanism and mediators alone do not possess any powers to compel the disputants to enforce a contract. These aspects of mediation make it an inappropriate method for some companies in international disputes.

Arbitration is most commonly used for the resolution of commercial disputes, particularly in the context of international commercial transactions. Arbitration, a form of alternative dispute resolution, is a legal technique for the resolving of disputes outside the courts, wherein the parties to a dispute refer it to one or more persons (arbitrators, arbiters or arbitral tribunal), by whose decision (award) they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.

China has quite extensive legislation in the area of international arbitration. These rules are mainly set out in the 1991 Civil Procedural Act and in the 1994 Arbitration Act. The Arbitration Act codifies both domestic and international arbitration procedures.

In addition to the statutes, several documents issued by the Supreme People’s Court give guidelines as to how the courts should handle international arbitral matters. As noted above, these documents are as important as the statutes. Two of the most important are the Notice on Court’s Handling of Issues in Relation to Matters of Foreign-Related Arbitration and Foreign Arbitration (1995 Notice), and the Notice on the Implementation of China’s Accession to the Convention On the Recognition and Enforcement of Foreign Arbitral Awards (1987 Notice).

It should be mentioned that the potential advantages of arbitration over judicial proceedings can be as follows: 1) arbitral awards are generally easier to enforce in other jurisdictions than court judgments; 2) when the subject matter of a dispute is highly technical, arbitrators with an appropriate degree of expertise can be appointed; 3) arbitration can be more flexible for businesses;

4) arbitral proceedings and arbitral awards are generally non-public and can be made confidential.

Arbitration of disputes has emerged as a workable alternative to reliance on the judicial system. Arbitration and conciliation between Chinese and foreign parties in economic and trade matters were traditionally under the exclusive jurisdiction of the China International Economic and Trade Arbitration Commission (CIETAC) under the China Council for the Promotion of International Trade (CCPIT) in Beijing and its sub-councils in Shanghai and Shenzhen. The CIETAC Arbitration Rules were amended several times over the past few years to accommodate the concerns of foreign parties and to accord with the requirements of the PRC Arbitration Act (1994). Unlike the situation at the People’s Courts, CIETAC permits foreign lawyers to represent their clients directly in arbitration proceedings.

CIETAC practices reflect the internationalisation of China’s official legal culture. By virtue of its hearing process, in which foreign lawyers can participate and at which foreign and international law can be pleaded as governing law, and through the inclusion of foreign specialists on its panel of arbitrators, CIETAC is constantly exposed to international norms. Moreover, CIETAC’s audience includes foreign firms which have the opportunity to select or reject CIETAC as an arbitration venue. These factors exercise a powerful influence, drawing CIETAC increasingly into the ambit of international norms. CIETAC arbitration decisions reflect an increased willingness to follow international legal norms in other cases where specific provisions of Chinese law are either unavailable or unclear. CIETAC arbitral awards are subject to enforcement internationally pursuant to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which China acceded effectively in 1987.

According to the CIETAC Arbitration Rules (revised and adopted by the China Council for the Promotion of International Trade/China Chamber of International Commerce on 11 January 2005, effective as from 1 May 2005) the CIETAC accepts cases involving:

1) international or foreign-related disputes;

2) disputes related to the Hong Kong Special Administrative Region or the Macao Special Administrative Region or the Taiwan Region; and

3) domestic disputes.

As regards the first category, in an opinion issued by the Supreme People’s Court in 1992, a “foreign-related” (she-wai) dispute is defined to include cases in which:

— one or both parties is a foreigner, a foreign enterprise or foreign organisation.

— the contract or other legal relationship was established, modified or terminated in a foreign country; or

— the subject matter of the dispute is located in a foreign country.

The CIETAC Arbitration Rules provide that although the official language of the arbitration commission is Chinese, proceedings may be conducted in a foreign language by agreement between the parties.

China Maritime Arbitration Commission (CMAC) focuses on resolving, by means of arbitration, contractual and non-contractual maritime disputes arising from, or in the process of, transportation, production and navigation by or at sea, in coastal waters and other navigable waters adjacent to sea.

The organisation of CMAC is similar to that of CIETAC and its current arbitration rules, which came into effect on 1 January 2001, are similar to CIETAC’s Arbitration Rules.

Alternatively to both CIETAC and CMAC, two key Asian arbitration centres outside Mainland China should be mentioned as appropriate for dispute resolution with Chinese companies.

The Hong Kong International Arbitration Centre (HKIAC) and the Singapore International Arbitration Centre (SIAC) have an excellent reputation for transparency and independence. Their rules reflect international best practice and can be easily assimilated. They have quality staff to administer the proceedings, and internationally renowned panels of arbitrators. HKIAC and SIAC are becoming mature arbitral institutions — HKIAC celebrating its 25th anniversary this year, are cheaper than their European counterparts, and are as just as good as them.

The existing Chinese legislation of enforcement guarantees that international arbitral awards are recognised and enforced effectively and smoothly in China, as in any other country. But the existence of legislation itself does not always mean its practical realisation. The main problem is inside the administrative routines, interpretation and settlement of these existing international rules in national law.

The actions and regulations stipulated by the Supreme Peoples Court do, however, confirm that China is trying to improve in response to the criticism. What can be seen today is that measures to comply with international standards are taken at the central level, i.e. through the above-mentioned regulations and other actions.

Taking into consideration the successful experience of foreigners in China, Ukrainian companies should pay attention to the following issues of resolving disputes with Chinese companies.

Chinese businesses are more inclined to be guided by concepts of fairness and equity, which lead to an expectation either that the strict terms of the contract should not be enforced or that the contract should be renegotiated according to changing circumstances. Similar attitudes may affect how Chinese conciliators and arbitrators approach the task of resolving disputes. However, to avoid any uncertainty as to how long consultations should last, it is best to provide in the dispute resolution agreement that the parties should proceed to arbitration if consultations fail to produce a settlement within a set period.

Ukrainian companies should insist on including a detailed and prompt arbitration clause in contracts with Chinese counterparties that will keep them out of court and will allow the selection of at least one foreign arbitrator.

It is also advisable to keep in mind that ad hoc arbitration awards may be refused in China. To diminish the possible problems that may arise in an enforcement procedure, it might be advisable to choose to solve the dispute at an arbitration institution.

Chinese counterparties are more likely to agree to arbitrate in regional venues such as Singapore and Hong Kong than to agree to subject themselves to the courts of a foreign jurisdiction with which they have no familiarity or experience.

It should be mentioned that the correct approach to negotiation with the Chinese is the promotion of a long-term relationship, the respectful promotion of Chinese interests, the maintenance of equanimity and friendship and, lastly, the promotion of the foreign party’s interests.