What price justice? is a current campaign by the English Law Society opposing certain proposals to change the local legal aid regime. The phrase came to mind in a different context recently – a commercial transaction between a Chinese company and a foreign company in which the terms were largely agreed but there was an argument about dispute resolution provisions.
The choice came down, as it frequently does, to either a Chinese arbitration institution or, instead, arbitration in a small offshore jurisdiction reputed for its neutrality when dealing with parties of different nationality.
The Chinese company broke the deadlock by suggesting that the price should be X (more favorable to the foreign party) if a Chinese institution were agreed or Y in the event that the foreign party insisted on an offshore process. The two figures were very different.
The implications may to some extent be debated, but my experience is that many foreign investors rightly or wrongly appear to share some doubts as to the efficacy of the local arbitration regime, whether based on experience or hearsay.
I suspect that such perceptions are likely to have some negative impact on investment in China, and that the issue is becoming more significant. The fact is that, for a variety of reasons, foreign investors are not rushing into China with quite the same lack of caution they once did.
Investors are legally entitled to choose offshore arbitration in the main inward-investment contract but are effectively forced to use the domestic system (courts or arbitration) for any disputes arising between the onshore business – which almost always has to be conducted through a Chinese subsidiary – and Chinese counterparties.
If foreign firms distrust the local system, as a number of them seem to, then this inevitably operates as a disincentive to investing in the first place.
What then can be done about this? There is an obvious opportunity in the near future, because the PRC's Arbitration Law is on the agenda for legislative discussion and possible reform in 2008. There are a number of issues worth considering.
First and foremost, foreign-invested Chinese companies should always be allowed to choose a process outside mainland China to resolve their commercial disputes. Market forces can then decide whether the local system continues to get business, with or without a price adjustment.
The local system may lose some business in the short term, but inward investment would receive a boost. It may also be beneficial for the local arbitration system, by imposing competitive pressure to resolve its weaknesses, irrespective of whether they are ones of perception or substance.
There has been talk for some time of addressing this issue in a limited way, by allowing disputes which currently have to be arbitrated in mainland China to be arbitrated in Hong Kong, on the basis that Hong Kong is part of China despite having a separate legal system. That would be some improvement, but an even broader liberalization would be a better idea in the long run.
Secondly, improvements must be made to the local arbitration system. The three most important points are:
Remove the local arbitration commission chairmen's monopoly over choosing presiding arbitrators. This involves a degree of patronage which has reduced the system's credibility among foreign investors in practice. Instead, parties should be allowed to agree on an appointing authority of their choice.
Clarify arbitrators' powers to order production of documents and the principles which apply in deciding whether to exercise those powers (currently a very unpredictable matter on which different arbitrators have widely different opinions).
Bring the remuneration system for arbitrators in line with international norms in cases involving international parties. This would encourage top arbitrators to accept positions in the local system.
Addressing these issues would go a long way to ensuring top-quality tribunals which provide a thorough and fair process for resolving commercial disputes, thereby increasing investor confidence.
There are a host of other points which could beneficially be reformed but without addressing the above fundamentals there is a real risk that other reforms will turn out to be more theoretical than real. It will be interesting to compare this wish list to what actually happens.