By Ariel Ye  Monique Carroll and Li Li  King and Wood Mallesons’ Dispute Resolution Group

1 Introduction

Historically, Chinese parties were able to avoid, to a large extent, the consequences of adverse awards made against them by international tribunals. This was primarily because Chinese courts were reluctant to enforce foreign arbitral awards against Chinese parties. In recent years, however, the Chinese Government has made significant advances in supporting domestic and international arbitration, in particular, in respect of the enforcement of foreign arbitral awards. Now international arbitration is a reality for Chinese entities doing business with foreign entities. This is reflected by the significant increase in the number of Chinese parties involved in international arbitration, however, there is also an alarming percentage of Chinese parties being unsuccessful in international arbitration. We believe the success rate of Chinese parties in international arbitration can be improved, by addressing a number of key issues set out below.

2 Why Chinese Parties Are Losing Arbitrations

It has been widely reported that Chinese parties obtain unfavorable results in a majority of foreign arbitration cases. Why is this so? Many scholars and commentators opine that the most significant factor contributing to Chinese parties’ lack of success in international arbitration is the ‘language barrier’. However, we consider there to be other significant factors, including: lack of familiarity with arbitral proceedings and lack of evidence, as explained below.

2.1 Lack of evidence

In international arbitration, documentary evidence will always be very persuasive. For example, evidence of a written agreement between the parties can provide relative certainty as to what was agreed compared with witness testimony as to what was agreed. However, in our experience, Chinese parties may not have documentary evidence available to support their claims because:

(a) the agreement, was made orally (in international arbitration, the oral agreement is likely to concern how to perform or amend an existing contract);

(b) the agreement is recorded in writing but the actual wording used does not record the Chinese party’s intention or understanding of what was agreed (this most commonly occurs when documents are drafted in English); and/or

(c) relevant documentary evidence has not been stored in a reliable, consistent way and so is no longer available.

(i) Oral agreements

Chinese parties are often comfortable relying on oral agreements in business. This is partly due to Chinese culture which sees many business negotiations or discussions held in informal settings, such as over dinner.

However, oral agreements, whilst easy to make are also easy to break. This is because there will always be different recollections of what was discussed and agreed. Secondly, there is no objective and verifiable evidence of the terms of the agreements (as in the case of a written contract).

For example, a Chinese ship manufacturer agreed to build and sell a ship to a foreign party. During ship building, the parties orally agreed to change the delivery time, but the Chinese party did not record this agreement. When both parties came to arbitration, because the buyer claimed damages for late delivery, the Chinese party had no objective or verifiable evidence of the modified agreement and was unsuccessful in the arbitration.

Basically, oral agreements leave more room to ‘maneuver’ and more room for interpretation, so if you wish to rely on the agreement, it is best to produce evidence of its terms.

In many cases, recording of the oral agreement can be achieved informally by an email setting out what was discussed and seeking confirmation of agreement from the other party. Further, requesting a written record should not be considered as showing a lack of trust or respect for the other party. Since a clear documentary record of what has been agreed can prevent disputes arising, we consider these records an important tool in managing relationships with foreign parties and facilitating their longevity. In any event, recording important oral agreements will not seem unusual to most foreign parties.

(ii) Language used

When drafting legal documents, or emails and other communication relating to contract negotiation or performance, it is always important to ensure that the words used clearly identify each party’s obligations and rights. Achieving this is often a ‘technical’ task and requires knowledge of the relevant laws that will apply to the agreement. It is not always practical to obtain legal advice before sending an email, for example, but if the stakes are high or if it is possible that a dispute will arise, we recommend that you seek legal advice before sending the email, or finalizing the agreement.

(iii) Inefficient record keeping

It is important to keep reliable records of the original contracts and correspondence relating to the performance of the contract and any modifications agreed. This will all be important evidence if a dispute arises regarding the performance of contract. Further, international tribunals may make ‘adverse inferences’ against a party who claims to no longer possess key documents relevant to a dispute.

Reliable documentary records will also be important for supporting any claim you wish to make for compensation. For example, if you claim that because of the other party’s breach of contract, your company lost business opportunities and revenue, you will need to produce evidence of the lost opportunities and revenue, including internally produced documents such as accounting records and financial plans or forecasts produced before and after the breach of contract.

A reliable document management system centrally stores, for an extended period of time, electronic and hard copy documents by project, subject matter or other relevant grouping. A reliable document management system is also important for dealing with staff turnover. That is, it ensures that when the manager responsible for negotiating and finalizing your company’s key agreements leaves your firm, you still have access to his or her records.

2.2 Lack of familiarity with arbitral proceedings

Whilst documentary evidence is the most important evidence in international arbitration, evidence from those employees responsible for the contract in question is also likely to be important.

Further, these witnesses may be cross-examined by the other party’s lawyers. Cross-examination is foreign to the Chinese legal system and many lawyers. It’s important to be represented by lawyers who understand the adversarial nature of international arbitration to prepare you for this process and to challenge the other party’s evidence with the same level of scrutiny.

In our experience, cross-examination is particularly confronting and difficult to handle for senior representatives of Chinese parties. It is therefore essential that legal counsel supports them through the process and prepares their expectations. For example, in one case the Chinese party’s senior representative felt so offended by the aggressive words of the opposing lawyer that he shouted back at the lawyer admitting facts adverse to his claim.

How can you be prepared?

First, you can consider if your company is in the habit of ‘doing business’ with foreign parties without relying on documentary records. If it is, then your company is at greater risk of being involved in an international dispute, and of being unsuccessful in that dispute. Putting in place systems (and habits), including a document management system, which create and store documentary records of contracts, contract negotiation, performance and modification will be an important step. We can assist you with developing appropriate systems and habits.

Secondly, keep in mind the possibility of a dispute, how this can be avoided and the need to seek legal advice at all stages of contract negotiation and performance.

Finally, if you are in a dispute, or consider it likely that a dispute may arise, please contact us. We can assist you with communications seeking to settle or avoid the dispute, ensuring that any agreement reached is properly documented. If international arbitration is commenced, by you or another party, we have expertise in identifying and preparing evidence, preparing your legal submissions, and seeking to reach early settlement of the dispute. If the dispute is not settled, we will use our extensive experience in international arbitration to support you and your witnesses through the cross-examination process and apply appropriate scrutiny to the other parties’ witnesses and evidence.

(In this article, “Foreign Arbitration” means arbitration located outside of mainland China where the language used in the arbitration is usually English.)