China's new local arbitration bodies are moving into the arena of international disputes. While some believe that this will broaden the choices available to foreign investors in China dispute resolution, in the short term there may be dangers in the lack of experience of these new commissions and their greater susceptibility to challenge in the Chinese courts.
Enforcement of awards remains the key. While the Supreme People's Court has stepped in to ensure enforcement of awards made by the China International Economic and Trade Arbitration Commission (CIETAC) and foreign arbitration bodies, enforcement of domestic arbitration awards is less secure. This makes it important for the Hong Kong International Arbitration Commission to clarify that its awards can be regarded as inter-national for enforcement purposes.
Right from the outset there has been confusion over the boundary of legal jurisdiction between China's new local arbitration bodies (set up under the 1995.
Arbitration is by far the most popular method of dispute resolution among foreign firms doing business in China. While it is possible to sue in a court, their independence from local governments remains questionable. The problem is particularly severe when suing state-owned enterprises with strong links to local court and government officials. Arbitration, while requiring a prior contractual agreement, offers a confidential, relatively speedy and low-cost resolution process.
The China International Economic and Trade Commission (CIETAC) has experience in handling an increasingly diverse range of disputes. Until the late 1970s trade-related disputes predominated, but Sino-foreign joint venture disputes increased in importance during the 1980s. In the past few years disputes involving banking documents, securities and real estate have begun toarbitration law) and that of CIETAC, which is supposed to deal with international trade and investment disputes. CIETAC rules state that it shall deal with matters that 'are international in nature'. The question has been how much inter-national involvement was required for a case to qualify for the attention of CIETAC.
Initially the concern was that disputes between Chinese firms and Sino-foreign joint ventures, which are classified as Chinese legal entities, would be regarded as domestic disputes and outside the remit of CIETAC. There was at least one case where the enforcement of a CIETAC arbitration award made to a foreign company against Chinese subcontractors was refused by a local court on the grounds that the case should never have been referred to CIETAC in the first place.
But Mr Peter Caldwell, Secretary General of the Hong Kong International Arbitration Centre, has noticed that "there
emerge. Founded in 1954, CIETAC is a veteran institution by Chinese standards and it is now regarded by most investors as professional and fair. In 1995 the commission took on over 900 cases which made it the busiest arbitration body in the world.
Arbitration tribunals commonly consist of three arbitrators, all of whom must be on the CIETAC panel of arbitrators. In the last few years international confidence in CIETAC has been boosted by the expansion of the panel to include foreign arbitrators. Hong Kong residents and foreigners now account for about one-third of the 291 CIETAC arbitrators. A standard procedure is for each of the parties to the dispute to nominate one arbitrator, while the third, and presiding arbitrator, is either nominated jointly by the parties or appointed by the president of CIETAC. In 1995 Mr Ulf Franke, Secretary-General of the Arbitration Institute of the Stockholm Chamber of Commerce, became the first non-Chineseseems to be a move for CIETAC to be able to take these types of cases" ?a trend which he believes may eventually resolve the issue by allowing CIETAC to get involved in all joint venture disputes. However Ms Sally Harpole of American law firm Deacons Graham & James' Hong Kong office believes that both joint ventures and CIETAC are being "very cautious" on questions of jurisdiction "with these questions not resolved in a conclusive manner".
Only in exceptional circumstances defined by international practice codes can awards made by CIETAC or foreign arbitral commissions be challenged by Chinese courts. Local arbitration rulings remain much more open to challenge in the courts. Courts can refuse to enforce local awards because of adjudged 'errors' in weighing evidence or in applying the law ?rulings which inevitably remain extremely vulnerable to arbitrary value judgements.
While CIETAC's ability to take on disputes between Chinese-registered foreign investment vehicles remains in doubt, the local arbitration bodies are moving into the arena of international disputes. The local arbitration commit-tees in Beijing, Tianjin, Shenzhen and Qingdao are among those that have recently been granted licences to arbitrate
arbitrator to lead a CIETAC tribunal as presiding arbitrator.
While the rules regulating international arbitration carried out under CIETAC (and its predecessors) have undergone several revisions since 1956, arbitration outside the international arena has developed more slowly. Before a new arbitration law came into effect in 1995, domestic arbitrations were carried out under the auspices of local administrations of industry and commerce.
The new law set up a whole new tier of arbitration bodies in more than 90 cities. It was designed to professionalise the handling of domestic arbitration by increasing its independence from local industrial bureaucracies and to standardise procedures and bring them into closer alignment with CIETAC rules and international practice. But CIETAC along with its its sister organisation, the China Maritime Arbitration Commission, continue to operate under their own distinct set of rules foreign-related disputes.
American lawyer and CIETAC panel arbitrator Stanley Lubman believes that, "Chinese trading companies and the lo-cal governments that supervise them are likely to prefer the local commissions to the main commission [CIETAC] ?or they will be leaned on to use them. And local governments will be pleased at the prospect of collecting arbitration fees."
"It certainly looks as if they are direct competitors," says Caldwell of the relationship between CIETAC and the local bodies. But the crucial issue for the local commissions, he believes, is finding arbitrators with sufficient expertise to conduct international arbitration.
One solution is to recruit onto the lo-cal arbitration panel arbitrators who are already on the national CIETAC panel. "The list of arbitrators of the Shenzhen commission are almost the same people as on the CIETAC sub-commission for Shenzhen," observes Caldwell. He was also recently approached by representatives of a local commission asking him to recommend arbitrators in Hong Kong.
Ms Vivien Chan of law firm Vivien Chan & Co in Hong Kong and a CIETAC panel arbitrator has recently been appointed to the local Shenzhen arbitration commission. She notes that the local commission there is now handling a lot of joint venture disputes. The lo-cal arbitration commissions are well placed to interpret local and municipal foreign investment laws and may be more logistically convenient in disputes away from the cities of Beijing, Shanghai and Shenzhen where CIETAC and its sub-committees sit. "It's not an unwelcome development so far as foreign investors are concerned," she adds.
Although the increasing number of arbitrators required for China-based arbitrations will make China arbitration procedures more transparent, it is not an immediate guarantee of a better system, Harpole cautions. She also believes that the new arbitration bodies are a positive development. "The issue is freedom of choice…. Not only the choice of whether it's CIETAC or the domestic arbitration commissions but also the choice of choosing ad hoc arbitration or even a commission from outside of China holding an arbitration in China."
To stay ahead, CIETAC has been seeking to ease the enforcement of arbitral awards which remains the Achilles' heel of arbitration in China. Its lobbying appears to be improving both the enforcement of its own awards and those made by foreign arbitration tribunals.
Foreign arbitral awards made against mainland-registered parties are enforce-able under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards which China signed in the late 1980s. But, as in the case of CIETAC awards, they still require a ruling in the local court where the Chinese party is based ?courts which can be vulnerable to local protectionist pressures.
Indeed until recently there was not a single publicised case of a foreign arbitral award being enforced against a mainland party, although there was one instance of such an award being enforced against aforeign party's assets in China.
Sensitive to such criticism, CIETAC has lobbied for increased supervision of local court enforcement rulings. An August 1995 Supreme People's Court circular stated that any local court re-fusing to enforce a foreign or CIETAC award has to refer the matter up to the Supreme People's Court in Beijing. Re-ports cited by Deacons now suggest that about five foreign arbitral awards have been successfully enforced in China. Deacons' Harpole believes that this circular is very significant. "There are very few countries in the world where you have a high level court that has done what China's Supreme Court has done. It is the clearest possible message to the lower level courts," she says.
There are a number of relatively in-nocuous reasons why awards fail to get enforced in China. Investors' unfamiliarity of the available mechanisms for enforcement can cause cases to fail because of time delays and procedural errors. This can happen in any country. Foreign firms in China are also often inhibited in their actions. They are sensitive about the publicity from pursuing court cases for relatively small amounts out of fear of damaging future business prospects in the country.
Hong Kong awaits ruling
The Supreme People's Court ruling lends its weight to the enforcement of CIETAC and foreign arbitral awards. But enforcement of awards made by local domestic arbitration, already open to challenge due to 'incorrect' weighing of evidence or application of the law, also remains outside the direct gaze of China's higher courts.
The matter is also of some concern to arbitrations carried out under the aus- _ pices of the Hong Kong International Arbitration Commission (HKIAC). Before the handover, the enforcement of Hong Kong awards was carried out in the same way as foreign awards through the New York Convention. Now there is some doubt if an award made in Hong Kong under Chinese sovereignty can be regarded as international for the purposes of enforcement. Hong Kong awards might even legally be regarded as a Chinese domestic award.
But Hong Kong should, in the normal run of things, be well placed to at-tract China arbitration business combining a well-developed legal system with proximity to the mainland. While Chinese executives would still require visas to attend hearings, the logistics would still be considerably easier and the cost lower than if the hearing were held in Europe or the US. The foreign party would be reassured on the neutrality of the arbitration set-up.
While HKIAC's caseload is around 200 -a year, only about 10 per cent of these cases involve a mainland-registered party. The proportion of these types of cases is growing slowly but its current level is still only about two per cent of CIETAC's annual caseload. The bulk of these cases are related to ship-ping, sale of goods and construction and there are very few disputes related to joint ventures. There are also a fair number of cases involving mainland-owned subsidiaries registered in Hong Kong. But in these disputes enforcement can only be carried out against Hong Kong assets and not the assets of the mainland parent.
Caldwell dismisses worries about enforcement of Hong Kong awards as a "minor hiccup" and says that his contacts in the judiciary, the Ministry of Foreign Trade and Economic Co-operation and the law-drafting commission are all "100 per cent certain that China wants to enforce Hong Kong awards in the same way that they were enforced be-fore July 1". He was told in October that there was a ruling on the subject being circulated among the Chinese judiciary that would be published very soon.
He feels that the arbitration issue is bogged down because of linkage to other more politically sensitive issues such as the reciprocal treatment of court judgements in Hong Kong and China.
Hearings in Hong Kong Interest in Hong Kong as a venue for arbitration is also being expressed by other arbitration organisations. The Paris-based International Chamber of Commerce (ICC), which has conducted arbitrations in Hong Kong for some years, has recently set up its first over-seas liaison office in Hong Kong. Part of the aim is to promote the use of ICC arbitrations in Asia as the preferred means for settling cross-border disputes.
While awards made by Hong Kong-based ICC. tribunals are classified as Hong Kong awards, the situation would be different if the Swedish Chamber of Commerce or the Singapore International Arbitration Centre were to hold arbitration hearings in Hong Kong ?a possibility which both of these two organisations has considered recently. Awards arising out of Hong Kong-based Swedish Chamber of Commerce hearings would, for example, remain Swedish awards for enforcement purposes: "As long as there is a question about a Hong Kong award they think there is a potential for people to use their service," says Caldwell. "If they can
hold arbitration hearings in Hong Kong it could be convenient for people".
There has also been some talk of CIETAC holding arbitration hearings in Hong Kong. "That's been very strongly denied by the people at CIETAC," says Caldwell. "People would see it as an at-tempt to take us over." He feels that the logic behind a merger with CIETAC is "nonsense", pointing out that enforcement in China is in any case irrelevant to 90 per cent of HKIAC cases.