The problem is enforcement

In an attempt to further establish its reputation as a leading international arbitration body, the China International Economic and Trade Arbitration Commission revised its rules on May 1, 2012 to be more in line with respected organizations like the International Chamber of Commerce. With Canadian imports and exports to China rising every year ($44.5 billion and $13.2 billion respectively in 2010), will these new rules do anything to solve the problem foreign companies have in enforcing their arbitration awards in China? The short answer is not really.

CIETAC, headquartered in Beijing, accepts more than 1,400 arbitration cases per year. As the best known arbitration body in China, Chinese companies often designate CIETAC as their dispute-resolution institution in their international contracts. Canadian companies contracting with these businesses are then also subject to CIETAC’s rules. CIETAC has been around in various forms since the 1950s, so updating its rules is not uncommon. However, with trade rising steadily between Canada and China, the rules of arbitration take on additional significance in 2012: The more business Canadians conduct with China, the more disputes will arise.

The two most notable changes to the CIETAC rules are that it now has the ability to consolidate two or more pending arbitrations into a single arbitration, and for the first time, it can order an interim measure. “I think the changes to CIETAC’s rules are useful and the most helpful one is the power to grant interim relief, which is beneficial if you’re a foreign company,” says Joe McArthur, a partner at Blake Cassels & Graydon LLP’s Vancouver office who practises commercial litigation and arbitration. “It means you don’t have to go to the local Chinese court to get injunctive relief. You can try to get it from the arbitration tribunal which may give you a modicum of comfort.”

Barry Leon, a partner and head of the international arbitration group at Perley-Robertson Hill & McDougall LLP in Ottawa, says the new rules are a positive step but they do not solve the problem of enforcing an award once you obtain one. “The rules themselves cannot revolutionize the process in China or anywhere else. It’s whether the jurisdiction is arbitration friendly that matters. You would want comfort that the judicial system in China is supportive of arbitration. It is moving in that direction but it won’t move because of a change in the rules; it will move because of structural changes and experience and a greater development of sophistication in the Chinese court system.”

McArthur agrees with Leon on this point. “The real issue with China, and one that has come up in my practice [see Blue Horizon Energy Inc. v. Ko Yo Development Co. Ltd], is enforcement. The new rules do little to address this problem, but to be fair, it is not something you would expect arbitration rules to deal with. The problem has more to do with the underlying Chinese law.”

In conducting business with China, McArthur says it doesn’t matter if your contract is subject to CIETAC rules or ICC rules because of the problem of enforcement. “China signed the New York Convention, which is the international treaty that governs the enforcement of arbitration awards. It is the application of that convention that is very uneven in China. The reason is because it is local courts that determines whether or not to enforce an arbitration award and there is a real problem with the treatment of all judicial and quasi-judicial rulings from outside China.” McArthur says Chinese courts often refuse to enforce an award on the grounds of “public policy,” an exception used by courts worldwide but employed with some frequency in China as a means to block awards.

When drafting or reviewing contracts with China, Leon says the most important thing to remember is this: “Don’t assume things are the same even if they look the same. For example, if you look at the rule for enforcement in China, it will look pretty much the same as the other rules based on the New York Convention. The problem is not how it looks on the surface but how it gets applied. And that is true of the arbitration process itself.”

Asked why trade with China keeps rising despite the uncertainty of the system, McArthur says: “There is always a risk that your award won’t be enforced when doing business with a foreign company. What we see here is an additional risk with China, and that is something that parties have to take into account before entering into agreements.” Leon does not believe the risks are any greater in China than they are in other parts of the world. “Doing business with China is less of a risk now than it was at one time, and it is less of a risk than it is in other countries. On the surface, the Chinese system is as good as anybody’s. You have to expect the unexpected. There is this idea in China that just because you sign a contract, it is not the end of the process.”

Leon admits there are problems but ultimately a lot of awards do get resolved through settlement. “When it comes to enforcement of a foreign award, one of the things that is perhaps even better than our system is the Chinese reporting system. Lower courts have to report refusals of awards to the Supreme People’s Court [the highest court], and so that means it will automatically go higher if your judgment is not enforced.” That sounds good in theory but there are multiple problems with the process. According to Leon, these include: The lower courts might simply refuse to report it and the parties have no remedy because it is an internal court process; the parties don’t have the right to be heard at the higher court level; there are no timelines built in so your case can get stuck in the lower courts for years and a decision may never be rendered; and even if you get a decision recognizing the award, you then have to execute it and you can run into problems of protectionism and the practical problem of obtaining the assets.

Leon believes entering into a contract with a foreign party is like getting married. The last thing you want to think about while planning the details is your divorce. “There is always someone running into the office at 11:30 p.m. saying, ‘we want to finish the contract by midnight. Can you give me an arbitration clause?’ You don’t know the background, you don’t have time to think about it. If you’re doing business in a place like China, you want to take more time. Try to do that before the last minute and you will probably wind up with a clause that will lower your risk to some degree. You’ll be in a better position if you get into a dispute.”

Interestingly, according to McArthur, the track record of a Chinese court enforcing a judgment of a foreign court is even worse than the enforcement of an arbitration award. “They respect the courts even less than the arbitrators.” So if enforcing an arbitration award is uneven and enforcing a judgment even worse, why is China so popular as a trading partner? “Because they have stuff we want to buy,” says McArthur.

Drafting tips

Here is some advice from Joe McArthur and Barry Leon on drafting or reviewing an arbitration clause in a Chinese-Canadian contract:

1. Don’t go overboard. Keep it simple. Don’t add a lot of conditions (30 days to settle, mediation, etc.) before the matter can go to arbitration. That just wastes time, especially since the parties can settle while the process gets underway and any time afterwards.

2. Make sure to stipulate English as the language of the proceedings. In the absence of the parties stipulating which language should be used, it can be Chinese, even if both parties speak English. The new amendments allow the China International Economic and Trade Arbitration Commission to determine the language, if required.

3. Stipulate which CIETAC sub-commission you want to oversee your case. Beijing or Shanghai are better than those in the smaller regions, for obvious reasons. “If you don’t use the right words, you may not get the region you want. Seek advice on exactly how to word it,” says Leon.

4. For practical reasons, try to establish the seat of arbitration anywhere but in mainland China. Even Hong Kong is better. Stipulate that you want an adversarial approach be used because sometimes there is an option, as per the CIETAC rules.

5. Check all the rules for where you are able to stipulate the intentions of the parties and address each point in your contract.

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