The Wisdom of Choosing China for Arbitration

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By Arthur Dong and Darren Mayberry

In the past 20 years the Chinese arbitration system has matured in many aspects, to the extent that foreign parties often favor arbitration clauses in their China deals. Even so, this change brings us to another question: Should a dispute resolution clause for a China-centered contract select a China-based institution to host the arbitration, or should a non-Chinese party instead take refuge with regional offshore powerhouse institutions?

Answers will, of course, vary according to each contract's particular circumstances. Nonetheless, Chinese arbitration institutions offer two clear advantages. First, Chinese courts will facilitate China's institutional interim measure requests. Second, Chinese institutions offer international service without the cost premium. The maturation of the Chinese arbitrations system has reached a point where Chinese institutions offer truly international arbitration, and these two advantages of selecting a Chinese institution can have a major impact on the outcomes of a dispute.

Chinese Institutions handle numerous Foreign-Related Cases

In 2016, Chinese arbitration institutions handled approximately 1,500 genuine[1] foreign-related cases. Guangzhou Arbitration Commission handled roughly a third of these arbitrations. The rest were split among the China International Trade Arbitrataion Commission (CIETAC), Beijing International Arbitration Center (BIAC), Shanghai International Arbitration Center(SHIAC), and Shanghai Arbitration Commission (SHAC). Hangzhou and Nanchang's Commissions have also hosted more than 50 foreign-related cases.

Take CIETAC, BIAC, and SHIAC as examples. All three have modern rules systems that were recently updated in 2015. Each includes some form of Joinder and Consolidation. None prohibit document production. BIAC and SHIAC only default to summary procedure when the amount in dispute falls at 1 million RMB or under. CIETAC's summary procedure applies even in amounts as high as 5 million RMB.

The Advantages

China's leading institutions offer two primary advantages over respected off-shore center competitors. First, China's judicial system allows only China-based institutions to facilitate preservation and interim measures within China for commercial arbitration cases. Second, China's leading institutions offer more affordable rates than regional off-shore competitors. We recommend seriously considering using China's leading institutions as long as either of these two considerations are important to the dispute resolution needs in your contract.

Interim Measures 

Of all these factors, interim measures should be at the top of the list. Interim measures include a broad array of remedies. The term embraces almost all remedies beyond monetary damages. Might it be necessary to freeze Chinese bank accounts to protect collection following an award? Is it conceivable that the Chinese party will hold critical evidence such that a preservation order might be advisable? If either may become a possibility, choose China. As long as Chinese institutions administer the case, itself seated in China, it will be much more convenient to apply interim measures.

A China-seated and China-administered arbitration removes the primary obstacle for a foreign party seeking interim measures against a Chinese party. If the arbitration happens outside China, Chinese courts regularly decline to grant interim measures. Essentially, offshore institutions will serve well as long as your enterprise only desires an award of money damages.

Disputes are often unpredictable in character. They can involve many unforeseeable contingencies. One should only surrender the option of interim measures if other compelling reasons favor selection of an offshore institution.Lower Costs 

Costs can emerge as a concern for moderate-value contracts. As a practical matter, institutional costs come in the form of both the commission's fees and arbitrator fees. A sizeable number of meritorious cases settle before the awards stage. As such, amicable resolution may result in each side bearing their costs. In general, the higher the amount of the subject contract, the more attractive an offshore "arbitration hub" premium service appears.

Nevertheless, rarely does it behoove parties to a million dollar USD contract to pay the premiums necessary for Geneva or Singapore's excellent service. CIETAC, BIAC, and SHIAC offer competitive filing rates. Additionally, respondents only pay fees upon filing counter-claims. A prospective foreign respondent has minimal upfront exposure under Chinese arbitration pricing. 

Furthermore, the rates for Chinese arbitrators at Chinese institutions remain competitive with their Singapore, Hong Kong, and even Korean peers. Chinese arbitrators in foreign-related cases charge fees more commensurate with their domestic peers. And they are every bit as qualified for international practice.

Qualified International Arbitrators

The CIETAC Panel List encompasses 410 foreign arbitrators from 70 jurisdictions. Parties agree to the Panel List upon selection of CIETAC, and yet they may appoint arbitrator off the panel list as long as both parties agree to do so. Chinese national arbitrators offer multiple language fluencies between them, and almost all include strong English language skills.

The chairperson issues the procedural order and runs the procedure. Therefore, a foreign party desiring an arbitration with common law characteristics may request a foreign arbitrator as chairperson to balance national representation on the panel. The most effective strategy for a foreign party will be to appoint a Chinese national and allow the selected institution to choose a foreign national chairperson.

Conclusion: Trust in Chinese Arbitration

A dispute resolution clause may select an institution from an array of jurisdictions. Obviously, the best selection will depend on a variety of factors specific to the transaction. Even so, a wise choice will contemplate Chinese arbitrations for China-related contracts with seriousness.

Years of Chinese development and local support has rendered reflexive aversion or heuristic suspicion of Chinese arbitration outdated, if such fears ever held merit at all. In any case, mainland arbitration offers two distinct advantages. Chinese institutions can implement interim measures since they have the support of Chinese courts. And Chinese institutions offer substantial cost savings without any practical compromise as to the international character of proceedings. Premium offshore service institutions have their place, but more contracts could benefit from the selection of China institutions.

 

[1] We only count disputes reaching beyond Hong Kong, Taiwan, Macau. If these jurisdictions are included, Chinese arbitration institutions handled over 3,000 foreign-related cases.

Arthur Dong is a Partner at AnJie Law Firm. Darren Mayberry is a Senior Associate at AnJie Law Firm. The authors contributed this article on behalf of Lexis Nexis, an AmCham China member company.