By Zhang Shouzhi Hu Ke and Xu Beibei    King & Wood Mallesons’ Dispute Resoution Group

A final arbitral award is the final and binding conclusion of the substantial dispute submitted to arbitration by the parties. It defines the winner and the loser of the game. In few occasions would the parties be willing to settle their disputes after an award has been rendered. However, settlement is still a wise choice when the disputed amount is huge, and the parties still have the will.

In 2011, we assisted 2 separate clients in negotiating amicable settlements after the arbitral awards were rendered in offshore arbitrations. We provide below a brief description of the two cases:

Case One: Arbitration Arising under a Confidentiality Agreement

A dispute arose out of an agreement on the confidentiality of technical information between a foreign party and a Chinese party concerning several ongoing large-scale projects with a disputed amount of more than USD 200 million. The forum was a notable offshore arbitration institute.

The tribunal made a partial award[1] and it recommended the parties to resolve their remaining disputes amicably in light of the partial award.

The parties jointly entrusted an independent mediator to chair the mediation process and a settlement agreement was reached in several months.

Case Two: Application for Recognition and Enforcement of an Australian Arbitration Award

In this case, an Australian mining company and a Chinese steel company had a dispute over their iron ore sales agreements, and the case was submitted to arbitration in Australia. The tribunal awarded more than USD 100 million to the Australian exporter.

In the recognition proceedings, the parties reached an overall settlement agreement to resolve all the disputes by continuing the purchase and sale of iron ore, and to re-establish their business cooperation.

This article aims at sharing our experiences and thoughts regarding these 2 cases involving post-award settlement.

I.    The incompleteness of a final award is an important motivation for post-award settlement

As mentioned at the beginning, an award defines the winner and the loser from a legal perspective. The former may prefer to consolidate the result in a hot pursuit, and the question arises as to what drives him to settle with the latter.

The reason is simple. In the area of international commercial arbitration, a final award does not guarantee a final resolution of the disputes, and the winner is not guaranteed to carry his smile till the end.

A.      Risks in Setting-aside Proceedings in the Seat

Parties to international commercial arbitrations will normally be able to, pursuant to the law of the seat of the arbitration, apply for setting aside the award or, in some forums lodge an appeal to local courts and thereby challenge the binding nature of the award.

In China, parties may, on the grounds of procedural irregularities, apply for annulling a foreign-related arbitral award according to Article 70 of the Arbitration Law. In jurisdictions implementing the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”), parties are able to apply to set aside an international arbitral award based on Article 34(2) of the Model Law; the 1996 Arbitration Act of England and Wales allows, in addition to applications for setting-aside, appeals on questions of law arising out of the award according to its Article 69.

A disadvantaged party in an international commercial arbitration of significant importance is very likely to raise various material or non-material procedural dissents – not only to delay the proceeding at one side, but also to lay down grounds for future resistance to enforcement. Violation of procedural rules or due process, whether significant or not, would be excuses for the losing party to seek judicial intervention in the seat or resist the recognition and enforcement in other jurisdictions. The winning party has to take these risks into account.

A recent notable case, Pacific China Holdings Ltd (In Liquidation) v Grand Pacific Holdings Ltd (HCCT 15/2010) before the High Court of Hong Kong, Court of First Instance, revealed such risks. The case involved an international arbitration conducted in Hong Kong under the ICC Rules of Arbitration. The court found that the tribunal denied a reasonable opportunity for the applicant to present its case and failed to comply with the agreement of the parties, and consequently set aside the award according to Article 34(2) of the Model Law. Remarkably, the court repeated the threshold for exercising discretion in favor of setting aside as under some previous authorities such as Paklito Investment Ltd v Klockner East Asia Ltd [1993] 2 HKLR 39 and Apex Tech Investment Ltd v Chuang’s Development (China) Ltd [1996] 2 HKC 293, that so long as the result could have been different if the procedural irregularity had not occurred, the court should exercise its discretion to set aside the award.

B.     Risks in Recognition Proceedings in Other Jurisdictions

If the losing party does not comply with the award and its assets were located outside of the forum’s jurisdiction, normally the award had to be recognized by other jurisdictions before being put into enforcement by local enforcing authorities.

The circumstances under which an application for recognition and enforcement can be refused under Article V of the New York Convention are exhaustive. That is to say, if no circumstance under Article V exists, the award should be recognized and enforced.[2] Though the New York Convention provides a pro-arbitration atmosphere for recognition of arbitral awards, the winning party is not guaranteed a favorable result.

The risk for the winning party in the course of recognition also finds its origin in procedural issues. In a recent case for recognition and enforcement of an arbitral award rendered in London, we, as counsel for the respondent, found that the award did not contain “reasons for the award”, where there was no agreement between the parties to dispense with reasons. This seriously violated Article 52(4) of the Arbitration Act 1996 of England. It is worth bearing in mind that some civil law jurisdictions would be more cautious applying “waiver” or “estoppel” in procedural issues, and unless otherwise agreed, failure to raise an objection to procedural irregularity before the tribunal or failure to seek remedies from the courts of the seat of arbitration does not prevent the party from arguing on these issues in the recognition and enforcement stage.

Furthermore, the legal system and culture varies from jurisdiction to jurisdiction and there are significant differences between common law and civil law jurisdictions. Judges of the enforcing courts have developed their legal way of thinking under their own legal traditions, and thus their ability to understand an award which is a product of another legal tradition is inevitably constrained. This increases the risk for an award to be rejected in another jurisdiction. In a recent case, Gao Haiyan v Keeneye Holdings Ltd (HCCT 21/2010) before the High Court of Hong Kong, the Court of First Instance refused enforcement of the award as the Court found that the arbitration commission, in inviting a third party to participate the conciliation process and putting forward a settlement proposal to a party without prior consultation with the other, gave rise to an apprehension of apparent bias. However, as a matter of fact, in the arb-med practice in mainland China, inviting a third party to assist the conciliation and to propose a settlement by the tribunal has a long history and can be seen in many occasions. The tribunal in the case did fail to follow the arbitration rules, but taking consideration of the story, it is unfair to put a label of “apparent bias”. Though the conclusion of the Court of First Instance has been overthrown by the Court of Appeal in late 2011, the lesson from this case should not be neglected; full consideration should be given to the differences in legal culture and practice between jurisdictions.

C.     Risks in Enforcement Proceedings in Other Jurisdictions

Having overcome the obstacles in the arbitration, setting-aside and recognition proceedings, the winning party is close to the finish. However, difficulties in enforcement may still cause a great deal of trouble.

Enforcement difficulties are normally caused by the losing party avoiding enforcement purposefully. Some may play a trick by designing a complicated corporate or transaction structure at the very beginning so as to escape quickly in case of severe liabilities. For example, a shell company in Hong Kong which is a party to a business contract may have nothing to be enforced against, while all of its business is conducted by another entity registered in another jurisdiction. Some may utilize the lack of supervision in some tax haven, or use deceptive means such as fake contracts, fake mortgages or fake litigation to transfer their assets quickly.

Enforcement difficulties get worse if the condition of the rule of law is not that pleasant. As Bose, Yap and Jaliwala said, “the reality is that enforcement of arbitration awards remains problematic in many countries in the world including several Asian jurisdictions. Corruption, local protectionism, faulty regulation, ignorance and systemic inefficiency make enforcement proceedings difficult, time-consuming and, sometimes, impossible.” [3] It seriously increases the risks that the local party would manipulate the enforcement procedure, causing additional enforcement costs to the winning party and eventually endangering the possibility of enforcing the award.

In China, enforcement difficulties have been haunting the court system for a long time. Difficulties in finding the respondent, locating the assets, obtaining cooperation from relevant parties and enforcing the subject assets, as revealed in a Supreme Court notice in 1999, were still serious problems. Resistance to enforcement is very common, illegal intervention and local or sectoral protection can be perceived, and some courts fail to comply with the law in enforcement activities. These are risks for the winning party to take into account.

D.     Actual enforcement of the Award may not resolve the dispute fully and thoroughly

Complex commercial disputes normally involve a series of legal relationships, which results in the dispute being divided into several legal proceedings. As the scope of arbitration is defined by the arbitration agreement, in the case where only disputes under one or several contracts go to arbitration, the tribunal would be incapable to give an overall resolution to the disputes between the parties. Also, in most cases the award is a zero-sum solution, with the root of the problem still being there and probably further developed.

For example, a dispute under a Sino-foreign joint venture may be connected to a dispute between the investor and the JV company, but the JV company is not bound by the arbitration agreement in the JV contract.[4] Therefore arbitration under the JV contract may not provide a full and thorough solution for the parties.

The series of disputes between Wahaha and Danone included 8 arbitration proceedings under the SCC Arbitration Rules, one arbitration proceeding in Hangzhou Arbitration Commission for a trademark transfer contract dispute, and about dozens of court proceedings in various jurisdictions including China, the United States, BVI, Samoa, France and Italy. Not a single award or court judgment would be able to solve their complex dispute and satisfy any party ultimately; on the contrary, settlement gave the parties a chance to fully consider an overall way out, and settle the dispute efficiently, fully and thoroughly.

In summary, an arbitral award is not a guarantee for the winning party. There exist many risks and uncertainties on the road to a final resolution. Being voluntary and less contentious, the conciliation process and the settlement agreement provide a mutually acceptable result from a substantial perspective. Furthermore, they also promote mutual understanding and respect to each other’s different opinions and needs through improved communications. It is a natural consequence that a settlement agreement is more likely to be respected and honored by the parties.

The incompleteness of arbitral awards makes settlement not only a need but also a realistic option for parties to arbitration.

II.    Post-Award Settlement Has Other Apparent Features and Advantages

In addition to the above, settlement has the following features and advantages compared to enforcing an arbitral award:

Firstly, settlement emphasizes peace-making through open discussion. It is a great asset for the parties to maintain and even develop their relationship.

The conciliation process is aimed at consensus between the parties. When leading the parties through the evaluation of their pros and cons, conciliation will focus on locating the balance point for the interests of the parties and trying to restore peace through enhanced mutual understanding. It will help the parties collaborate rather than confront each other. Also, for the losing party who disagrees with the final award, which is a form of judgment on the substantial issues of the parties, its reasoning still provides some guidance after all for the parties understand the merits of the case more objectively, and thus creates important opportunities for the parties to enter into settlement.

In the aforementioned application for recognition and enforcement of an Australian arbitration award, the parties re-established their cooperation through settlement, and combined the resolution of the dispute with their long-term interests, leading to a win-win result.

Further, the confidentiality of the conciliation process could avoid unwanted disclosure of business secrets and other information, and reduce damage to public relations and other negative impacts that may be caused by the disclosure of the dispute.

The confidentiality of arbitration does not apply to judicial review and enforcement procedure, and thus the dispute and the result would go to the public domain in these procedures and even result in a media trial, which is unwanted by both parties. Conciliation process, the settlement agreement and other related information are generally kept confidential, which is helpful for the parties to give and take more rationally and restore peace. The parties in the two aforementioned cases, not only successfully avoided disclosure of business information through settlement, but also protected their public image from intervention of the media.

In addition, post-award settlement is more flexible and efficient while less cost-consuming. The conciliation process is very flexible, convenient and efficient in its setting of form, place and period; and the settlement agreement would save a lot of time, money and energy that would be consumed in judicial procedures.

In the aforesaid arbitration arising under a confidentiality agreement, if the parties continued the arbitration and relevant judicial proceedings, a considerable amount of legal costs would be incurred, and the key technical team of both parties would have to input a lot of time and energy to cope with the arbitration which would in turn influence their normal business and lead to a lose-lose result. The post-award settlement, releasing both of them from the case and allowing them to focus on the business, is a wise choice.

III.    Approaches for Post-Award Settlement

Selecting the appropriate approach towards settlement depends on the particular circumstance of each case.

A.      Party-to-Party Negotiation

In a voluntary negotiation, the parties would be able to manage their negotiation process and are more likely to go beyond the dispute and take their commercial needs into consideration. Furthermore, face-to-face negotiation would reduce worries and misunderstandings. The shortcoming is that parties would be more reluctant to compromise and the process may be relatively long.

In the case where parties have good negotiation powers and skills and can control their moods and information, party-to-party negotiation is a good approach; and in the case where it is possible for the parties to continue their cooperation in the future, it is highly recommended for the parties to rebuild their relations through this process.

B.     Third-Party Mediation

Third-party mediation of commercial disputes normally involves a professional mediator or mediation institute in the process, employing their professional experience and judgment to find a possible solution for the parties.

Mediators are professionals specially trained, with legal background or knowledge of a particular industry, and bound by professional disciplines and ethics. Sometimes the mediator would be a person respected and trusted by both parties, which encourages open and honest discussion. The mediator acts like a diplomat: on one side, he exchanges information and ideas with parties through face-to-face discussions, trying to understand the true needs of the parties fully and in depth and to find a mutually acceptable balance; on the other side, he needs to guide the parties to compromise with each other and promote the final settlement.

In the case where there is still intense confrontation and strong emotions, entrusting an independent mediator as a go-between for the parties to the mediation is a better choice.

If the award has entered into judicial proceedings, the settlement can be conducted under the supervision of the court. The professional ability, life experiences and mediation skills, along with the judicial resource he possess, would be a treasure for the settlement process.

C.     Enhancement Mechanism for Settlement Agreements

If the debtor fails to honor its obligation under the post-award settlement agreement, the creditor is able to enforce the binding arbitral award without entering into a new proceeding for the same subject matter of the arbitral award, making breach of the settlement agreement a less-likely option for the debtor. Therefore, post-award settlement is more likely to be honored by the debtor.

If the award has been submitted to judicial procedure, and the performance of the settlement takes a comparatively long period, the applicant may be unwilling to withdraw its application. In such cases, parties may request the court to grant a stay of the proceedings, or issue a suspension ruling as the case so requires.

Setting-aside and recognition proceedings are trial processes instead of enforcement proceedings. Thus when suspending the proceedings, “Suspension of Litigation” under Article 136 of the Civil Procedure Law, rather than “Suspension of Enforcement” under Article 232, shall apply. Article 136 further provides that litigation shall be resumed after the grounds for suspension disappears.

For matters not covered by the arbitral award, the parties may make use of an enhanced mechanism for the settlement agreement such as notarization and judicial confirmation. A judicial confirmation mechanism is provided in Article 20 of Several Opinions on Establishing and Improving the Resolution System for Disputes by Linking Litigation and Non-litigation Cases (Fa fa [2009] No.45, issued by the SPC on 4 August 2009), which says: "for an agreement in the nature of a civil contract reached through mediation by an administrative organ, a people’s mediation organization, a commercial mediation organization, an industrial mediation organization or any other organization with a mediation function, the parties may apply to the people’s court having jurisdiction for confirming the validity of such an agreement after the mediation organization and mediator affix their signatures or seals to it."

IV.     Conclusion

Post-award settlement provides an efficient, convenient and secure way for creditors to realize their rights and can be widely used in the resolution of international commercial disputes. In China, where there is a long-history of a culture of conciliation and huge market opportunities, post-award settlement may serve as a wise choice in many occasions.

[1] Partial awards, though rendered by the tribunal with respect to part of the dispute between the parties, are final and binding. Different from interim awards or interlocutory awards, conclusions in partial awards would not be altered by the final awards.

[2] However, time limitation for enforcement under the law of the enforcing jurisdiction still applies to the enforcement of arbitral award and expiration of the limitation may lead to the award though recognized, but unable to be enforced. Limitation is generally regarded not violating the New York Convention, as Article III of the Convention clearly prescribes that each contracting state shall “enforce them in accordance with the rules of procedure of the territory where the award is relied upon”. In China, the SPC Reply regarding Bunge S.A.’s Application for Recognition and Enforcement of English Arbitral Award ([2006] Min Si Ta Zi No.47, issued on 8 May 2007) has clarified that an application for recognition is not restricted by the limitation, but an application for enforcement should be brought out before the limitation period expires.

[3] R Bose, N Yap & A Jaliwala, “Enforcement of International Arbitral Awards in Asia- Paying Lip Service to the New York Convention”, International Congress of Maritime Arbitrators, XVI Congress Papers, Singapore, 2007.

[4] See the SPC Reply on Whether JV Companies Is Able to Sue Shareholders for Liability for Breach of Contract of Shareholder’s Non-fulfillment of Their Contribution Obligations and Whether Arbitration Agreement in JV Contracts Bind the JV Companies([2004] Min Si Ta Zi No.41). In the former case, the JV company sued a shareholder for breach of contract due to non-fulfillment of its contribution obligations, and the shareholder raised challenge to jurisdiction invoking the arbitration clause. The SPC held that JV company was not a party to the JV contract and thus not bound by the arbitration agreement, and thus rejected the challenge. In the later case, the tribunal for a dispute under a JV contract exercised jurisdiction over the dispute between the investor and the JV company. The SPC held that the arbitration clause in the JV contract could not bind the lease contract dispute between the investors and the JV company, and the tribunal’s decision over the lease contract dispute exceeded the scope of the arbitration clause in the JV contract.