The involvement of Chinese “giants” in arbitration outside of China has come at a price. Parties can lack experience at how best to handle international disputes. They rush precipitously into relationships with “local” on-the-ground law firms who themselves do not necessarily have sufficient international arbitration expertise, and more significantly lack the cultural knowledge and language skills to act as sufficient liaison. In this article, we share what we believe are the seven most serious mistakes made by PRC entities when trying to arbitrate abroad. We respectfully venture to add that these mistakes are by no means confined to Chinese clients – all parties embarking on dispute resolution in a country unfamiliar to them would do well to reflect on what follows.
Mistake 1 – insufficient (or no) attention to the proposed arbitration clause at tender negotiation stage
This is probably because the dispute resolution clause is not regarded as a “commercial” term – although, in reality, the way in which it is drafted, and the institution/laws it selects, could end up costing the Company tens or hundreds of millions of USD.
It is all too easy to pick – or more often not even to read – a “standard’ arbitration clause providing for, say, arbitration in London or Paris or Stockholm and applying, for example, English law.
But is that what the PRC tendering party really wants? What about arbitration in Hong Kong or Singapore, using their laws? Choosing Hong Kong arbitration may also appeal to the other party, because awards obtained in Hong Kong can be mutually enforced on the Mainland, thanks to a specific Agreement entered into between the two Governments. Parties should specify in what language they wish the arbitration to be conducted, and should give careful thought as to whether to specify that the Tribunal should comprise just a sole, or three (unusually more) arbitrators.
Further, at the project negotiation stage, it is important for PRC parties to consider whether there are any Bilateral Investment Treaties (“BITs”) between China and the country in which they are to undertake the project, which themselves may afford additional arbitration protection.
China has over 80 BITs in force with different countries, meaning that when major threats to investment occur during the course of a project (e.g. nationalisation, expropriation, insurrection), it may be possible for PRC parties to avail themselves of treaty protection and start an arbitration using the treaty – provided of course that at the inception stage, the project was structured in such a way as to bring the BIT into application.
Mistake 2 – On occurrence of dispute, rush straight off to the “local” lawyers
This is, perhaps, the most common mistake – and dare we suggest the most costly one. It is superficially logical that, if a dispute occurs say in Africa, the PRC claimant or respondent should rush straight off a local firm in the relevant country. But parties should ask themselves this:
- Does the local firm have sufficient expertise of international arbitration, such that if the matter has to arbitrate all of the way to London, Stockholm, Hong Kong, they can provide meaningful insight into selection of international arbitrators, the strategy of international arbitration, settlement? Often it is important to know the specialist arbitrators – for example in the field of infrastructure. Can local lawyers boast that knowledge?
- Does it have sufficient specialist knowledge to handle the arbitratrion? Take disputes over an infrastructure project. These are best handled by lawyers who specialise in infrastructure, who know the project jargon and technicalities, and more importantly who have successfully conducted infrastructure arbitrations all over the world.
- Are the best international arbitration lawyers really residing in the local firm’s offices? Take for example major UK law firms with offices in Africa. Do they really send their best lawyers to the Congo branch?
- Do local lawyers really understand our cultural requirements, and are we able adequately to communicate in our own language on so vital a multimillion dollar arbitration?
To us, then, the winning formula is straightforward:
- TEAM LEADER + LOCAL FIRM
The team leader should be an international law firm that possesses all of the requisite skills as summarised by us in a) to d). Of course, there are essential roles for the local firm. They will best know: how local laws will affect the arbitrations; whether the effect will be positive or negative; and the impact of local custom and practice.
Furthermore, if it becomes necessary to seek ancillary relief from (or appeal to) the local courts, then of course that will fall to the local lawyers. But in primary position, setting all of this strategy and communicating it all to the PRC client, will be the international law firm.
Mistake 3 – Insufficient attention to Selection of the Arbitrators
The Key to success in any arbitration is very often the appointment of the arbitral tribunal. Should lawyers or specialists in the industry be appointed as arbitrators? Or a combination of each? Does the legal team personally know the future arbitrators? These are all important issues that need to be considered.
In a high value construction arbitration we did on the Taiwan High Speed Rail project, we managed to secure the appointment of all three members of the arbitration tribunal as being international arbitrators, which one way or the other, helped our client succeed in achieving a favourable outcome. Had the Taiwanese party been persuaded to accept the appointment of local nationals as the arbitrators, we might have a less favourable arbitral award.
In addition, certain protocols actually allow lawyers to interview the arbitrators before they are appointed, and at a second stage before they select a Chairman. One should bear in mind that those protocols have to be very strictly agreed with the other side and the potential arbitrator – in which international dispute resolution (“DR”) advisers will play an important policing role.
Mistake 4 – Not drawing up a detailed protocol for handling international arbitrations
Clients involved in international arbitrations are always concerned about the length and cost of the arbitration process. Therefore, it is important to take full advantage of the flexibility inherent in international arbitrations to achieve an efficient, and hence cost effective arbitration process. By taking into account factors such as the sum in dispute, complexity of the issues involved and the financial position of the client, international DR advisors work to develop specific procedures that will generally make their client’s arbitration more efficient and hence cost effective.
A good protocol would:
- consider carefully the tribunal’s availability (in terms of their ability to devote the time to the pre-hearing stages of the arbitral process, their availability to attend the merits hearing and their capacity to render a timely award) and their expertise for deciding the particular dispute in question;
- recommend a costs protocol be agreed between the parties at the very beginning of the arbitration, with the aim to set out some basic rules relating costs (such as the costs following the event) so that our clients will know where they stand before they embark too far along the process;
- investigate with client’s opponents the possibility of agreeing on a cap on recoverable costs so as to again let our clients know what is involved with regard to costs at the earliest time; and
- work with the opponent to appoint a sole arbitrator where the dispute appears to be small, or where issues do not need the analysis of three arbitrators.
As the arbitration progresses, it would:
- request that the arbitral tribunal convenes a very early procedural meeting to establish the procedures and timelines of the whole arbitration and in particular, setting the date for the merits hearing (in order to ensure availability of all parties and the tribunal to attend the hearing at a date as early as practicably possible);
- at the early procedural meeting, address the most appropriate location for the oral hearing in terms of convenience and cost (rather than defaulting to the seat of arbitration);
- explore with the arbitral tribunal and the opponents the possibility of expert teaming, expert conferencing, and adopting the latest version of the IBA Rules on the Taking of Evidence in International Commercial Arbitration;
- request and, if possible, obtaining a commitment from the arbitral tribunal at the outset of the proceedings that the award will be issued within a reasonable time;
- consider whether it is appropriate for the dispute to be dealt with by a “documents only” arbitral process, obviating the expense and delay involved in the conduct of oral hearings;
- encourage consolidation and joinder of parties and disputes where appropriate;
- consider whether a “fast track” schedule for the expedited hearing of the dispute is appropriate where the issues in dispute can be dealt with swiftly and/or a prompt resolution of the dispute is of particular importance to the parties; and
- explore the possibility of a determination of preliminary issues that may lead to a quicker resolution of the dispute.
Before the hearing, it would:
- identify as soon as possible issues in the arbitration that can be taken ahead of the main hearing, the resolution of which would be helpful to settlement and economy
- try to limit and focus requests for the discovery of documents, and work with the opponent to determine the most effective means of dealing with electronic documents.
- encourage experts to meet to identify common views and to pinpoint, with clarity, the points of disagreement; and
- where appropriate, agree to limit the length of written submissions with a view to saving costs.
At the hearing, it would:
- consider dividing time during the oral hearing between the parties on a “chess clock” basis to encourage the parties’ counsels to manage time efficiently;
- use video conferencing for non-local witnesses whose testimony is not expected to be lengthy and/or crucial, and considering its use for procedural meetings; and
- avoid the cost and time involved in multiple witnesses testifying about the same facts.
Mistake 5 – Ignoring cultural sensitivities
In resolving international disputes, it has always been important for clients to know the cultures of the overseas entities they are dealing with, and the cultural and political context of the particular seat of arbitration. Factors to take into account include:
- the opponent’s way of doing business and dealing with disputes;
- the opponent’s way of thinking, and the factors affecting their thought; the opponent’s cultural habit of negotiation; and
- any political or legal risk (such as bureaucratic procedures) that client may encounter locally.
We have a recent example in the Middle East. The PRC client tried to settle a large claim without success. We decided to time some preliminary issues in an arbitration to conclude before Ramadan, the Holy Month (where, similar to Chinese New Year, Arabic entities prefer to conclude settlements). Working with our PRC law firm colleagues, we won five out of six of the preliminary issues. Sure enough, the Dubai entity offered settlement just before Ramadan.
Mistake 6 – Over-use of outside Queen’s Counsel (“QC”)
Here, we are not referring to barristers who have joined international law firms. We have two such candiates in our Dubai office, both infrastructure specialists, Tim Taylor and Mark Hoyle.
But sometimes, Chinese companies and PRC law firms get seduced into thinking that they should choose an external London QC to help conduct crossborder commercial disputes, and not international law firms – this is a mistake. A QC is not trained to deal with clients and client matters. They are trained to talk to the judge or the arbitrator – not the client. He or she is not trained to take witness statements, nor deal with experts or documentary disclosure. Their main training is to carry out the advocacy and cross-examination at the hearing.
Therefore, it is advisable that Chinese companies engage international DR advisers as their handling solicitors to give instructions to QCs. Such work arrangements can ensure better communications between the Chinese companies and the QCs so that disputes can be resolved in a strategic way.
Mistake 7 – Rushing to settle too early
Some Chinese companies may worry that proposing a settlement negotiation is a sign of weakness. In fact, taking a hard line in settlement negotiations can undermine any such impression, so attempting settlement should always be considered as one of clients’ options for resolving international disputes.
The natural tendency of clients is to rush in and initiate settlement at the very beginning. But what they have missed in doing so is the importance of settling from a position of strength. We handled a huge petrochemical dispute in Shenzhen. The client naturally wanted to settle by making the most sweeping concessions very early on in the battle.
However having looked into the merits of the case, we persuaded our own client to hold off and maintain a position of toughness for a period long enough to allow the opponent to see that we were serious in our intentions. The above strategy paid off, in the sense that we settled this huge case for an amount above our client’s modest expectations and more importantly before any arbitration hearing had taken place. Timing is therefore everything. Settlement strategy should include:
1 Proposing formal mediation – an appropriate time should be picked to propose mediation, e.g. at the outset of the case, or after an exchange of submissions has clarified the issues, or after the arbitral tribunal has provided its preliminary views. In choosing a mediator, clients should look for someone with knowledge not only of law but also of the industry and the cultures involved. If you select the right mediator, mediation can be useful.
2 Making settlement offers – where applicable law permits, clients’ international DR advisers will consider making a “without prejudice save as to costs” settlement offer at an early stage. This will put pressure on the opponent to consider the outcomes of arbitrations seriously and protect clients’ cost position.
Over the course of arbitrations, you should investigate into the opponents’ pressure points, analyse any change in circumstances, and where necessary, make appropriate adjustments to their strategies as the arbitration progresses. It will be useful for the purpose of seeking settlement, to know:
- what the opponent’s short and long term business plans are;
- whether there is any restructuring or M&A activities within the opponent’s group;
- whether there is a change in management of the opponent; and
- whether the opponents are involved in any major business disputes or litigation.
Chinese companies should seek international DR advisers’ advice on how to assess the opponents and the changes, and what impacts would they have on the chance of settlement and the overall strategy plan.
Lastly, we will provide you with an overview of the enforcement of international arbitration awards and judgment obtained from foreign litigation.
Disputes resolution is a war. It needs careful strategy. The army needs careful composition – international DR advisers with sufficient Chinese culture, language and infrastructure specialism, plus the local lawyers.
We hope this article can provide readers with insight on how issues arising from international arbitrations can be dealt with. We hope there will be more Chinabased lawyers rendering high-quality legal services to Chinese enterprises expanding their businesses abroad, that they can provide a strong support for the expansion of Chinese companies’ business ventures, and the globalisation of the Chinese economy.
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