China Law Insight : China Law Insight: China Commercial and Intellectual Property Lawyers and Attorneys, Full Service Law Firm: King & Wood

I. Choice of Arbitration Tribunal

Contracts in which one party is a foreign entity will contain foreign elements, allowing the parties to choose their jurisdiction without restriction under PRC law. The parties to such a contract may decide at their discretion whether to choose an arbitration tribunal within China or in another country, or resort to ad hoc arbitration to resolve disputes.

A WOFE or CJV established or to be established by a foreign company in China is generally regarded as a Chinese company under PRC law. Therefore, under PRC law, the contracts for the transactions carried out by a WOFE or CJV do not involve any foreign elements. If the contracting parties in a transaction between PRC entities choose a foreign arbitration tribunal, Chinese courts may hold the arbitration clauses in the contract void on the basis that the parties intend to elude PRC law. Therefore, it is recommended that a WOFE or CJV shall appoint a Chinese arbitration tribunal in contracts which do not contain a foreign element.

II. Choice of Arbitration Rules

In most cases, a WOFE or CJV actually appoint a PRC arbitration tribunal (often China International Economic and Trade Arbitration Commission, "CIETAC") for dispute resolution to comply with PRC law's and courts' preference for domestic arbitration tribunals for domestic companies. However, since WOFEs and CJVs may not be familiar with China's arbitration system, they will often include in the dispute resolution clause of contracts a qualification requiring application of non-Chinese arbitration rules, e.g. United Nations Commission on International Trade Law rules ("UNCITRAL Rules"), under the CIETAC arbitration procedures.

A. Feasibility and Risks of UNCITRAL Rules

Although the arbitration rules of CIETAC ("CIETAC Rules") empower the parties to choose other arbitration rules for application in CIETAC arbitration proceedings (1), cases that actually apply UNCITRAL Rules to CIETAC procedures are rare. Irreconcilable discrepancies exist between the procedural administration systems of UNCITRAL and that of CIETAC, such as in the requirements for appointing an authority to appoint the arbitrators. Often, the parties are required to renegotiate and switch to CIETAC Rules during arbitration proceedings due to the conflict of the UNCITRAL Rules and the CIETAC procedural administration systems. Switching rules mid-arbitration exposes the parties to the risks of delayed or suspended proceedings because of the potential for respondent's failure to cooperate. Also, after the arbitration proceedings are completed, the respondent may petition the court to revoke the arbitration award on the basis that the arbitration proceedings are questionable.

B. A Comparison of UNCITRAL Rules and CIETAC Rules

Beyond the risks associated with mid-arbitration re-negotiations for applicable rules, a foreign company or its WOFE or CJV, as the claimant, is generally disadvantaged under the UNCITRAL Rules for other reasons, also.

a. Procedure Efficiency

Time Limit

The claimant's best interests lie in an efficient and speedy conclusion of the arbitration proceedings. However, UNCITRAL Rules are relatively lenient with the time limits for procedures and provide no time limit on the rendering of an award, including the final or supplementary award or corrections to an award. CIETAC Rules expressly set forth that an award shall be rendered within six months (four months for domestic arbitration proceedings) from the date of the formation of the arbitration tribunal.

Documents Submission

Under UNCITRAL Rules, an arbitration proceeding starts once the claimant submits and delivers the arbitration notice to the respondent. The authorized arbitration tribunal may decide at its discretion on the time limit of submission of the Application for Arbitration, defense and counterclaim. However, UNCITRAL Rules are silent on the time limit for the submission of counterclaims by the defense. Under CIETAC Rules, the time limit to submit an Application for Arbitration, defense and counterclaim is 45 days and for submitting counterclaims by the defense is 30 days. For a domestic arbitration proceeding, both time limits are 20 days.

Constitution of Arbitration Tribunal

The procedures of appointing arbitrators provided by UNCITRAL are quite complicated. In general, with UNCITRAL Rules, the appointment process for a sole arbitrator requires approximately three months and for three arbitrators requires approximately five months. This appointment process does not include the time required to determine the appointing authority. The complexity and uncertainty associated with UNCITRAL Rules are likely to result in delays of the arbitration proceedings. Under CIETAC Rules, the appointment process for a sole arbitrator requires approximately 15 days and for three arbitrators requires approximately 30 days (excluding the process of arbitrator appointment by the Chairman of CIETAC).

Duration of the Complete Arbitration Proceedings

Under UNCITRAL Rules summary procedures are not an option. But under the CIETAC Rules an award can be rendered within three months through summary procedures.

Through the above analysis, it is obvious that the application of UNCITRAL Rules does not favor the claimant's desire to accelerate the arbitration process. In fact, UNCITRAL Rules are likely to provide the respondent opportunities to delay the procedures since UNCITRAL's procedures are complex and allow for extended time limits.

b. Responsibilities of the Parties

Since UNCITRAL Rules were not intended for a specific arbitration tribunal and can also be applied to other entities(2) , they lack an administrative mechanism. This lack creates an administrative gap when UCITRAL Rules are applied to CIETAC, which must be filled by the parties. For example, the parties are responsible for compliance with various statute of limits and procedural matters (including but not limited to appointing representatives and personnel for assistance, raising objection to the arbitrator, requesting for the witness to appear at court, requiring the arbitration tribunal to make explanations or corrections to an awards rendered) and must ensure the documents (including but not limited to the arbitration notice, application for arbitration and defense) are delivered to the counterparty. If the parties are not experts in administering arbitration proceedings, they risk some fault that may be used by the counterparty as a ground for refusal of the enforcement the award. For this reason, the parties should be very careful about such risks.

c. Flexibility

Under UNCITRAL Rules, the parties have less discretion and less flexibility than under CIETAC Rules. For instance, with CIETAC Rules the president of the arbitration tribunal is appointed through negotiation among the parties. However, under UNCITRAL Rules, the president of the arbitration tribunal shall be appointed by two arbitrators or the appointing authority. Another example is CIETAC Rules protection of the compromise process during the conciliation proceedings from reference in the hearing proceedings, a protection that is not available in UNCITRAL Rules. Also, CIETAC Rules allow the parties to prepare document translations independently, while UNCITRAL Rules require document translations to be arranged exclusively through the arbitration tribunal.

d. Coordination with PRC Law

Some of UNCITRAL Rules are in conflict with PRC law. Therefore, rulings rendered based upon such rules may not be feasible legally in China. For example, UNCITRAL Rules empower the arbitrational tribunal to take interim measures of protection on the subject matter of the dispute. But, in China, such power is exclusively exercised by the Chinese courts.

C. Custom Tailored Exceptions to CIETAC Rules

For all of the reasons stated, it is unnecessary for a WOFE or CJV to replace CIETAC Rules with other rules. Choosing CIETAC Rules are helpful to manage the uncertainty associated with other rules and to lower the risks of revocation of the final award. In addition, a WOFE or CJV may alter the arbitration rules under the arbitration clauses or make special clauses to the extent that CIETAC Rules permit to better protect the parties' legitimate rights and interests. The parties may include the following alternative clauses in their contract: 

a.English is the language to be used in the proceedings;
b.The parties may appoint a non-CIETAC arbitrator onto the Panel of Arbitrators(3);
c.The grounds on which an arbitrator shall withdraw from a hearing shall include inability or failure of arbitrator to perform responsibilities;
d.The arbitration tribunal shall hear the case through inquiry or argument and make arrangements for a record of hearing; and
e.The expert that the arbitration tribunal consults within China or the expert witness that the arbitration tribunal appoints shall not be an interested party to the case.

However, the special arrangements for or tailored clauses providing exceptions to CIETAC Rules are not accepted where such arrangements or clauses cannot be implemented or are in conflict with the laws of the jurisdiction of arbitration. Although the parties are allowed to tailor CIETAC Rules to cater for their specific transaction, most of the rules do not need to be altered and, in practice, no additional arrangements need to be made.

To minimize a delay in the arbitration process arising from the conflict in arbitration rules and arbitration procedures administration systems and the uncertainty in the result of arbitration, it is recommended that a WOFE or CJV should appoint a PRC arbitration tribunal in the dispute resolution clauses in a contract without foreign elements. Also, a WOFE or CJV may also make changes or additional arrangements to the existing applicable arbitration rules to better utilize the administration procedure function and procedural guidance by arbitration tribunals and better protect their legal rights and interests as the respondent.

 The article was originally written in Chinese, the English version is a translation. This article was first published in the firm's periodical China Bulletin April Issue, 2008, Vol.32)

 Notes:

(1) Article 4 Paragraph 2 of the CIETAC Rules provides that "...the parties may execute such agreement where the parties agree to adopt other arbitration rules or change the corresponding clauses of this Rules, unless such agreement cannot be executed or is in conflict with mandatory regulations of the place of arbitration."

(2) The UNCITRAL Rules also apply to ad hoc arbitration.

(3) The parties may appoint any person they trust or with certain industry background or professional knowledge as arbitrator.

Overview - The previous version of the Rules in effect was the 1999 version, which was adopted by the IBA Council on June 1, 1999, and replaced the 1983 IBA Supplementary Rules Governing the Presentation and Reception of Evidence in International Commercial Arbitration. Noting the wide acceptance of the Rules in the international arbitration community and the need for reflecting the latest developments in international arbitration, the IBA initiated a review process in 2008. The revised version of the Rules was developed by the members of IBA Rules of Evidence Review Subcommittee, assisted by members of the 1999 Working Party.

Purpose - The Rules were issued to provide a fair and efficient process for the taking of evidence in international arbitration. The Rules provide mechanisms for the presentation of documents, witnesses of fact and expert witnesses, inspections, as well as the conduct of evidentiary hearings. The Rules are designed to be used in conjunction with, and adopted together with, institutional, ad hoc or other rules or procedures governing international arbitrations. They reflect procedures in use in many different legal systems and may be particularly useful when the parties come from different legal cultures.

Revisions - The 2010 revision to the Rules is a full-scale one, through which the Rules, whilst maintaining those fundamental characters, refined some important terms and / or mechanisms, including without limitation:

• Definition of “Document”: compared with the definition in the 1999 version, the updated one is more “open”, saying “Document means a writing, communication, picture, drawing, program or data of any kind, whether recorded or maintained on paper or by electronic, audio, visual or any other means.”
• Definition of “Evidentiary Hearing”: similar to the situation with “Document”, the updated one here enriches the methods that can be adopted in evidentiary hearing in international arbitration, saying “Evidentiary Hearing means any hearing, whether or not held on consecutive days, at which the Arbitral Tribunal, whether in person, by teleconference, videoconference or other method, receives oral or other evidence.”
• Definition of “Request to Produce”: unlike the above two terms, the updated one here overwrites the idea in the previous one, saying “Request to Produce means a written request by a Party that another Party produce Documents.” The 1999 version defines it as “a request by a Party for a procedural order by which the Arbitral Tribunal would direct another Party to produce documents.” Obviously, the arbitral tribunal’s role in the stage of request to produce becomes less active under the 2010 version.
• “Consultation on Evidentiary Issues”: this term entitles a new Article 2 that is created in the 2010 version of the Rules. As is explained in paragraph one of this article, under this “consultation” mechanism the arbitral tribunal “shall consult the Parties at the earliest appropriate time in the proceedings and invite them to consult each other with a view to agreeing on an efficient, economical and fair process for the taking of evidence.”
• Content of a “Request to Produce”: corresponding to the definition of this term mentioned above, in Article 3 of the 2010 version, the respective rule is supplemented as for the situation where Documents in electronic form is required, saying “.... in the case of Documents in electronic form, the requesting Party may , or the Arbitral Tribunal may order that it shall be required to identify specific files, search terms, individuals or other means of searching for such Documents in an efficient and economical manner.
• “Good faith”: some may consider that this “good faith” rule is so established in almost every single jurisdiction that it is unnecessary here in the Rules. However, it is mentioned twice in the 2010 version, interestingly at the beginning and the ending thereof: (i) in paragraph 3 of the Preamble, it says “The taking of evidence shall be conducted on the principles that each Party shall act in good faith and be entitled to know, reasonably in advance of any Evidentiary Hearing or any fact or merits determination, the evidence on which the other Parties rely.” (ii) in paragraph 7 of Article 9, it says “If the Arbitral Tribunal determines that a Party has failed to conduct itself in good faith in the taking of evidence, the Arbitral Tribunal may, in addition to any other measures available under these Rules, take such failure into account in its assignment of the costs of the arbitration, including costs arising out of or in connection with the taking of evidence.”

* Ms. Ye, head of the firm's international dispute resolution practice, was privileged to participate in the review process of the Rules as a member of the IBA Rules of Evidence Review Subcommittee, and sincerely congratulates the IBA on this momentous move.
 

Evasion or Negative Response
Regardless of the size of the dispute or the size of the Chinese company involved, some take an evasive attitude when confronted by overseas disputes, either failing to respond at all or hiring cheap and inexperienced foreign lawyers. This can put the Chinese parties at a severe disadvantage and it was a common situation at the beginning of the reform of investment laws in China. Now it occurs less frequently.

Instructing a foreign law firm to form the legal team
Currently, when dealing with complicated international disputes, many Chinese companies instruct large international firms as their key legal advisors. These firms in turn hire well-known local lawyers in third countries as and when needed. The advantage of doing things this way is that the legal team has enough experience and, when fully prepared, may have the power to persuade foreign courts and arbitrators, increasing the success rate of the Chinese companies involved.
However, this strategy leads to two common problems. First, fees are relatively high. Lawyers in foreign law firms generally charge high rates. Second, communication can be an issue. While there are no obstacles to communication between foreign firms and the corresponding foreign courts and arbitrators, communication between foreign firms and their Chinese clients may not be so effective. Different legal cultures and dispute resolution practices sometimes make it difficult for Chinese clients and foreign lawyers to fully understand one another.

Normally litigation lawyers at foreign firms do not understand Chinese and are often not very well acquainted with the commercial practices of Chinese companies. Chinese lawyers hired by international firms do not face language obstacles, but they may lack experience in complex international arbitration procedure. Because of this, Chinese clients often encounter difficulties establishing truly effective communication with their foreign counsel.

Hiring a Chinese law firm with experience in international litigation and arbitration to create an international legal team
This is a new combination whereby a Chinese company involved in an international litigation or arbitration proceeding hires, a Chinese law firm with experience in international litigation and arbitration to be responsible for building a global legal team. The advantages of this new strategy are the efficient use of fees and the increased efficiency of lawyer/client communications. As Chinese lawyers with international experience can read Chinese and directly draft in English, this saves on document translation costs. In addition, as Chinese lawyers understand the thoughts and concerns of Chinese clients, they can more effectively communicate with their Chinese clients. Moreover, key Chinese litigation lawyers with international experience are based in China rather than abroad. This makes meetings and day-to day communication with Chinese clients easier.
When facing commercial disputes abroad, particularly in the areas of foreign investment or production, hiring an internationally experienced firm of Chinese lawyers to lead foreign counsel and build an effective global team can be an excellent choice for Chinese clients.
 

Certainly, when clients choose a team led by Chinese lawyers, the lawyer’s understanding of English is not enough. The Chinese lawyer should:
 

• Have a depth of experience in foreign litigation and arbitration
• Understand the workings of international firms
• Understand the needs and concerns of Chinese clients
• Have a sizable team of its own in order to cope with a large number of tasks in a short period of time and in a variety of urgent situations

For an example of King & Wood’s experience leading a global team in complex multijurisdictional litigation, follow this link.

如何解决海外投资引起的跨国商业纠纷

近年来，中国企业的海外投资业务快速增长，尤以能源矿产、银行业、IT业和制造业等行业表现突出。2009年8月18日，中国石油化工集团公司宣布以约合72.4亿美元的价格成功收购总部位于瑞士的Addax石油公司，这是迄今为止我国公司进行海外资产收购最大的一笔成功交易。在此前的几年，中石油也进行了几次大的海外并购交易。例如，中国石油于2009年5月收购新加坡石油公司约45.51％的股份，交易对价约合10.2亿美元。另外，中国五矿集团公司、中国有色集团、宝钢集团、中国工商银行等企业也在对外投资方面大有作为。

随着中国企业对外投资的不断增长，商业争议时有发生。根据我们的经验，中国企业在应对海外争议案件方面大致存在以下几种模式：

一、逃避或消极应对

无论大小案件，也无论中国公司的规模大小，有些中国公司在应对海外商业争议案件时会采取逃避态度，不出庭或者找经验不足但收费低的外国律师去应对。这种做法通常都使得作为案件当事人的中国公司处于极为不利的境地。这种情况在对外开放的早期比较常见，近年来已经不常出现。

二、聘用境外事务所，由该外国所组建律师团

目前有不少的中国企业在应对复杂的海外争议案件时，倾向于聘用国际大型律师事务所作为其首席律师，再由该事务所视案件需要选聘其他国家的律师，组建律师团。这种模式的好处在于，这样的律师团通常具备足够的经验，而且如果准备充分，有能力去说服外国的法官或外国仲裁员，加大了中国公司在海外争议案件中胜诉的机会。

但实践证明，这种模式常存在两个方面的问题：第一是费用高昂。境外国际性律所事务所的律师费普遍比较高；第二是沟通问题，即尽管境外律师组成的律师团与境外的法院或境外仲裁机构的沟通没有障碍，他们与中国客户之间的沟通却往往不尽如人意。由于法律文化和争议解决途径方面的差异，中国客户与其聘请的境外律师有时候难以进行有效的沟通。

通常，境外律师事务所的有诉讼经验的律师不懂中文，对中国公司的商业做法也了解不多，而受聘于国际所的中国律师在语言上虽无障碍，却又往往欠缺海外诉讼仲裁程序的经验，因此中国客户常常感到与自己聘的境外律师进行有效的沟通比较困难。

三、聘用有国际诉讼仲裁经验的中国律师事务所，由该中国所组建律师团

这是一种新的组合方式，即中国企业在涉及境外的诉讼或仲裁程序时，聘请具有国际诉讼仲裁经验的中国律师事务所，再由该中国所根据案件的需要组建律师团。这一模式的优点是可以节约成本，并提高客户与律师间的沟通效率。因为有国际诉讼仲裁经验的中国律师可以阅读中文文件，并可以直接草拟英文文件，这样就节约了相当的法律文件的翻译成本。另外，中国律师比较了解中国客户的想法和担心，因而可以高效地跟客户进行沟通。并且，中国的有国际经验的诉讼律师就在国内，比远在外国的国际诉讼律师更方便与中国客户沟通。

因此，对中国公司而言，在面对跨境商业争议（尤其是海外投资、生产引起的商业争议）时，聘请有丰富国际诉讼仲裁经验的中国律师，由这样的中国律师负责组建并引领包括境外律师在内的律师团，不失为一种理想的选择。

当然，如中国客户拟遵循本模式，聘请中国律师来组建律师团，则这样的中国律师仅仅懂英文是远远不够的。能够胜任本模式下角色的中国律师必须：

• 拥有丰富国际诉讼仲裁经验；
• 了解境外律师事务所的运作；
• 了解中国客户的需求和担心；
• 有相当规模的团队，能够应对短时间内的大量任务以及各种突发情况。

请点击本链接，以了解金杜在引领国际律师团队解决复杂的跨司法区域争议方面的案例。

In this recent case, the court vacated a previous labor arbitration decision on the grounds that the Labor Contract Law (effective Jan. 1, 2008) did not apply retroactively to the case at hand. The plaintiff in this case started to work for a Beijing medical technology company in Nov. 2007 with a probation period that lasted until Jan. 2008. In Feb. 2008, he was terminated for incompetence. He filed for a labor arbitration and was awarded RMB 3600 compensation under the Labor Contract Law. The company requested the court vacate the decision. Upon review, the court determined that the arbitrator retroactively applied the Labor Contract Law on severance calculation and vacated the arbitrator's decision on that ground.

This is the first reported case of a court vacating a previous labor arbitration award. Once vacated, the case could not be submitted to arbitration for a second time and the only recourse is now to seek judicial remedies before the courts.

In light of recent labor employment legislation, this decision will become persuasive authority for similar employment disputes. Unlike other countries in terms of costs and processing time, to arbitrate an employment dispute in China requires no filing fee and a final decision will be obtained within a couple of months. Labor arbitration filings have tripled since the promulgation of the new Labor Contract Law. Previously, either party could appeal the arbitration decision to the court to have a completely new trial of both factual disputes and legal issues. Under the new Labor Mediation and Arbitration Law, as illustrated by this case, arbitration decisions will now have certain limitations as to judicial appeal/review. In the short term, it will effectively reduce the court's case load. In the long term, it will teach the public to have a more rational view of employment litigation. For practitioners, the amount in controversy now becomes an important factor in evaluating the overall procedural strategy, since certain small claims of employment disputes will have limited grounds to appeal arbitration decisions.
 

Contracts in which one party is a foreign entity will contain foreign elements, allowing the parties to choose their jurisdiction without restriction under PRC law. The parties to such a contract may decide at their discretion whether to choose an arbitration tribunal within China or in another country, or resort to ad hoc arbitration to resolve disputes.

A WOFE or CJV established or to be established by a foreign company in China is generally regarded as a Chinese company under PRC law. Therefore, under PRC law, the contracts for the transactions carried out by a WOFE or CJV do not involve any foreign elements. If the contracting parties in a transaction between PRC entities choose a foreign arbitration tribunal, Chinese courts may hold the arbitration clauses in the contract void on the basis that the parties intend to elude PRC law. Therefore, it is recommended that a WOFE or CJV shall appoint a Chinese arbitration tribunal in contracts which do not contain a foreign element.