The Council of Hong Kong Professional Associations

1. The Council of Hong Kong Professional Associations Arbitration in Mainland of China – A better alternative to resolving commercial disputes? By Christopher To christo@cityu.edu.hk

2. Outline • Why use Arbitration • Key Factors in drafting Arbitration Clauses • Domestic Arbitration Law and Procedure • International Arbitration Law and Procedure • Practical Tips and the Pitfalls • Enforcement of Arbitration Awards in China

3. IntroductionBusiness Disputes • Definition of a Dispute • The New Shorter Oxford English Dictionary 1993 defines it as • “A logical argument” or • “An oral or written discussion of a subject in which arguments for and against are put forward and examined” or • “An instance of disputing or arguing against something or someone, argument, a controversy” or • “A heated contention, a disagreement in which opposing views are strongly held” or • “The act of disputing or arguing against something or someone; controversy, debate” or • “A fight, a struggle”

4. IntroductionBusiness Disputes (cont’d) Examples of International Business Disputes • Contracts on sale of goods (including commodities) • Distributorship, agency and intermediary contracts • Construction, engineering and infrastructure contracts • Intellectual property contracts • Registration of domain names • Joint Venture agreements • Maritime contracts ( such as bills of lading, charter parties) • Dealings with a pre shipment inspection agency • Dealings with customs authorities • Documentary Credit arrangements • Employment Contracts • Where a State or a State owned entity is involved

5. IntroductionWays to Resolve Disputes • Violence • Avoidance • Negotiation • Mediation • Adjudication • Arbitration • Litigation

6. BATNA • Best • Alternative • Toa • Negotiated • Agreement

7. WATNA • Worst • Alternative • Toa • Negotiated • Agreement

8. Negotiation • Interests/Priorities • Options • Standards • Constraints • Alternatives to Agreement

9. Barriers to Negotiation • Emotions • Lack of Information • Lack of Creativity • Miscalculation

10. What a Mediator Can Add to Negotiations • Open communication • Help parties understand interests and priorities • Help generate creative solutions • Help discover mutually acceptable standards • Help parties understand negotiating constraints • Help assess alternatives to agreement • Bring closure • Help attain ratification

11. Personal Qualities of a Mediator • Listening skills • Patience • Commonsense • Ability to close • Ability to summarise • Analytical skills • Ability to keep confidences • Ability to recognise the issues • Lateral thinking • Neutrality • Persuasive ability • Persistence • Creativity

12. What is Mediation ? • Mediation is a voluntary, non-binding, private dispute resolution process in which a neutral person helps the Parties try to reach a negotiated settlement.

13. Why Mediation Works ? • Facilities communication and separates the people from the problem • Helps overcome deadlock and emotional blockages • Restores the negotiation process • Identifies and focuses on the real issues and needs of the Parties • Gets the right people and the right information to the table • Helps Parties to reassess their case • Increases the options for resolution • Keeps ownership of the problem and the settlement with the Parties • Restores and safeguards relationships

14. Mediation is Not • Mediation is not toothless • Mediation is not just compromise • Mediation is not a bar to litigation or arbitration • Mediation is not what lawyers or managers do ‘all the time’ • Mediations is not a waste of time and money if it fails • Mediation is not ‘yet another’ cost to the unfortunate Parties • Mediation is not a sign of weakness or for ‘wimps’ • Mediation need not prevent Parties having their ‘day in court’ • Mediation need not ‘disclose your hand’ • Mediation need not be risky • Mediation is not counselling

15. What are the Main Strengths of Mediations ? • It can take place quickly and often with relatively little expense in contrast to taking the dispute to a court, to a tribunal or to arbitration. • It focuses on the parties’ real commercial, emotional and psychological needs and not just on their legal rights. • It gives the parties an opportunity to participate directly and informally in resolving their own dispute.

16. What are the Main Strengths of Mediations ? (cont’d) • It gives the parties control over the process itself and the outcome • It produces outcomes which are likely to endure because the parties themselves have chosen them. • It eliminates the conflict and hostility that nearly always accompany the compulsory decision of the dispute by a court, tribunal or arbitrator. • It can improve understandings between parties with an ongoing relationship.

17. The Corner-Stones of Mediation • Confidentiality • Ownership by the Parties • Neutrality and impartiality • Avoiding assumptions • Respect, empathy and genuineness

18. The Do’s and Don’ts • Do not make a non-negotiable demand in the joint session and walk out (or threaten to) if your needs are not met • Do not insult the opposing lawyer in the joint session • Do not insult your opposing party • Prepare • Bring crucial documents • Provide legal support • Bring a businessperson with authority to settle • Factor in other benefits which may result from a settlement • Trust the mediator • Stop, look, and listen

19. Iron Laws of Mediating • No one will make a difficult decision if there is any possible way to avoid it. • All specific dispute have to end sometime. • No settlement is entered into without some doubt and some trust.

20. General Issues1. What is Arbitration ? • Flexible, Inexpensive, Confidential, Fair and Final • Features distinguishing a reference to arbitration from other dispute resolution techniques : • the presence of a dispute or difference between parties which has been formulated in some way or another; • the dispute of difference has been remitted by the parties to a person to resolve in such a manner that he is called upon to exercise a judicial function; • where appropriate, the parties must have been provide with the opportunity to present evidence and / or submissions in support of their respective claims in dispute; • the parties have agreed to accept the decision. • Arbitrators are appointed by or on behalf of the parties in disputes and has to decide a dispute that has already arisen. Inquisitorial powers are not normally given to an arbitrator. • Arbitration is conducted in accordance with the terms of the parties’ arbitration agreement, usually found in the provisions of a commercial contract between the parties.

21. General Issues : 1. What is Arbitration ?Essential Features of Arbitration • Consensual – arbitration agreement • Party autonomy – e.g Choice of tribunal, manner of case presentation, procedure and powers of the tribunal • Jurisdiction of the tribunal is fixed primarily by the terms of the arbitration agreement and the submission to arbitration • Final and legally binding process • Limited scope for intervention by the courts

22. General Issues2. How is the Arbitration Started ? • Disputes governed by arbitration agreements trigger the arbitration process. • Arbitration agreements come in two forms : i. where parties to a contract include a clause in which they agree to resolve any dispute which may arise under the contract by arbitration. This is known as an arbitration clause. Many Hong Kong trades and industries have applicable standard forms of contract with standard arbitration clauses, although parties can tailor clauses to suit their circumstances. ii. where parties are already in dispute but their contract does not contain an arbitration clause, they may enter into a separate agreement to refer the matter to arbitration. This is known as a submission agreement. • Occasionally disputes are referred to arbitration by a court order or the operation of a statute.

23. General Issues2. How is the Arbitration Started ? (cont’d) “ Disputes hereunder shall be referred to arbitration, to be carried out by arbitrators named by the International Chamber of Commerce in Geneva in accordance with the arbitration procedure set forth in the Civil Code of Venezuela and in the Civil Code of France, with due regard to the law of the place of arbitration. ”

24. General Issues : 2. How is the Arbitration Started ?The Agreement INSANE CLAUSES “(1) Should either party come to feel that the Arbitrator is insane or for reasons it comes to know after commencement of the arbitration, it may consult with the other party, and should both parties agree that the Arbitrator is likely to be insane, they shall serve a notice of doubt on the Arbitrator. “Causes giving rise to a notice of doubt” must be extreme and not be limited to continuous making of senseless remarks, absentmindedness and queer conduct such as dancing alone in the public without cause, and the parties may serve a notice of doubt only once during the arbitration.

25. General Issues : 2. How is the Arbitration Started ?The Agreement (cont’d) INSANE CLAUSES (2) On such notice of doubt being served the Arbitrator may not refuse medical examination by a psychiatrist specialist at one of the hospitals listed in Appendix 1 appended to and made a part hereof. (3) If in the opinion of the psychiatrist specialist the examination would require more than four weeks or if the psychiatrist specialist is unable to conclude that the Arbitrator is positively insane, then the Arbitrator shall be deemed to be not insane. The medical examination shall be at the parties’ cost and shall be conducted under the condition that the result will be made known only to the Arbitrator and the parties.

26. General Issues : 2. How is the Arbitration Started ?The Agreement (cont’d) INSANE CLAUSES (4) If the Arbitrator is found insane, he shall resign in which event he shall not be entitled to the fee for the services he will have rendered, but each party shall pay to the Arbitrator a get well feeof Yen 100,000 and one-half of the disbursements covering the amount the Arbitrator will have expended in connection with the arbitration. If the Arbitrator is found not insane as the result of the examination, the parties shall jointly provide him with a letter of apology and each party shall pay a so-sorry feeof Yen 1,000,000 to the Arbitrator which he may treat as damages for tax purposes. The arbitrator, however, may not count the time spent for the medical examination as time spent for arbitration.

27. General Issues : 2. How is the Arbitration Started ?The Agreement (cont’d) INSANE CLAUSES (5) While the provisions of these clauses are not intended to permit the parties to take the arbitrator to the hospital by dint of force, it does not bar the parties from initiating judicial proceedings for removal of the arbitrator. Such proceedings may be resorted to only where the arbitrator refuses to subject himself to medical examination or where the parties are not satisfied with the findings of the psychiatrist that the arbitrator is not insane. If the parties initiate judicial proceedings and fail to remove the arbitrator, each party shall pay a nuisance-feeof Yen 2,000,000 to the arbitrator. During such proceedings, the arbitrator may proceed, but the arbitrator may not render an award. If rendered, such award may not be enforced.”

28. General Issues : 2. How is the Arbitration Started ?The Agreement (cont’d) MAGIC FORMULA “ Any dispute, controversy, or claim arising out of or in connection with this contract, including any question regarding its existence, validity, or termination shall be finally resolved by arbitration under the Rules of [rules/institution]. The tribunal shall consist of [a sole/three] arbitrator(s). The place of arbitration shall be [city]. ”

29. General Issues : 2. How is the Arbitration Started ?The Agreement (cont’d) OTHER USEFUL POINTS • Language • Expertise and special requirements of arbitrators • Discovery • Multi party proceedings • Costs • Confidentiality • Med-arb, ADR • Sovereign immunity waiver

30. Points to Consider when Drafting an Arbitration Clause Agreement to Arbitrate Require Negotiation, Mediation and Conciliation? If so, Fix Time Limit

31. Points to Consider when Drafting an Arbitration Clause (cont’d) Select Rules Ad Hoc Institutional UNCITRAL No Rules AAA HKIAC ICSID Other Centre for Public Resources ICC LCIA Comm Arb Rules Int’l Arb Rules Name appointing Authority (“AA”)

32. Points to Consider when Drafting an Arbitration Clause (cont’d) straight forward case, smaller amount in dispute Determine Number of Arbitrators Large amount in dispute 3 1 1 Period for agreement by parties Institution / AA selects all 3 Claimant nominates several from pre-determined acceptable category; Defendant picks one Each side picks one Exchange lists of names Requiring meeting Selection by Institution / AA No Rules Default: If party fails to appoint Institution / AA appoints Pre-designated list; Defendant picks one Fix time period; if no agreement Fix time period Fix time period? Institution / AA selects 3rd Party designated selects 3rd Restrictions on choice (i.e. nationality) AAA-style list procedure? Require consultation with parties? Fix time period Provide that arbitrators shall be independent and impartial?

33. Points to Consider when Drafting an Arbitration Clause (cont’d) Select Seat Factors : NY Convention ratification; limited mandatory procedural rules; absence of restrictions on counsel. arbitrators; good facilities; limited judicial intervention City in Defendant’s Home Country Place of Performance Neutral Place Provide that hearings may be held anywhere arbitrators find convenient?

34. Points to Consider when Drafting an Arbitration Clause (cont’d) Choose Governing Law Procedural Law = Seat of Arbitration Substantive Law Non Specified “General Principles of International Law” Specify National Law

35. Points to Consider when Drafting an Arbitration Clause (cont’d) Provide Optional Procedural Matters (Specify on or more) Provide time limits Consolidation Think about other possible procedures (i.e. after determination of liability each side submits damages proposed and arbitrators must pick one) Discovery Tribunal – Appointed Expert(s) Documents Depositions Require ability for parties to cross-examine or to comment No Restrictions Arbitrators’ Discretion Language Provide limits? Only one Two, neither dominant Two, but require translation to one dominant

36. Points to Consider when Drafting an Arbitration Clause (cont’d) Issuance of Award Permit partial awards Final award only Injunctive relief No injunctive relief No injunctive relief Permit court action for injunction to maintain status quo pending arbitration Permit arbitrators to issue injunction or both All awards final and binding on parties

37. Points to Consider when Drafting an Arbitration Clause (cont’d) All awards final and binding on parties Permit arbitrators to act as amicable compositeurs Permit specific performance Permit arbitrators to adapt contract arbitrators may award costs All to winner As arbitrators may determine award interest ? or both Pre-judgment Post-judgment rate ?

38. Points to Consider when Drafting an Arbitration Clause (cont’d) Provide for judgment currency? Award may be enforced… or both In any court having jurisdiction thereof Designate specific court and consent to jurisdiction Waive sovereign immunity if necessary Exclude court appeal? In England & Switzerland: yes In other countries, optional

39. Mainland of China • Institutional arbitration widely recognized in the Mainland of China. • More than 180 Chinese arbitral institutions in existence as of 2006. • Article 16 of the Chinese Arbitration Law requires the designation of an “arbitration commission”. • Ad hoc arbitration is not encouraged.

40. Landscape of Dispute Resolution • Judicial Proceedings/Court Litigation • Alternative Dispute Resolution (ADR) • Negotiation • Conciliation/Mediation • Expert Determination • Commercial Arbitration • Others

41. Advantage of Commercial Arbitration • Party Autonomy • Expert Adjudication • Confidentiality • Finality of Award • Universal Enforceability

42. Categories of Commercial Arbitration • Ad Hoc Arbitration • Ad Hoc Arbitration is banned in mainland China. • Institutional Arbitration • Leading International Arbitration Institutions ICC Court in Paris, LCIA in London, SCC in Stockholm, AAA in New York, SIAC in Singapore, HKIAC in Hong Kong and CIETAC in China • More than 200 local arbitration commissions in Mainland China

43. Types of Arbitration Proceedings Institutionalized An institutional arbitration is one which is administered by one of the many specialist arbitral institutions under its own rules of Arbitration. Ad-hoc Ad-hoc arbitrations often take place under the provisions of a submission agreement which itself often establishes the arbitral tribunal and sets out the procedural rules upon which the parties have agreed. An ad-hoc arbitration arises under an arbitration clause.

44. Advantages of Ad Hoc Arbitration • Flexibility – Can be shaped to meet the wishes of the parties and the facts of the particular dispute – Requires complete cooperation of the Disputants. • Saving on administrative costs. • UNCITRAL Arbitration Rules a substitute for the rules of arbitral institutions – offer a low cost and speedy, flexible alternative to institutional arbitration.

45. Disadvantages of Ad Hoc Arbitration • When an arbitrator refuses to disqualify himself, it usually requires court assistance to obtain his removal. • Lengthier procedure if challenge of the arbitrator occurs. • Courts feel less comfortable with ad hoc arbitrations as they feel much more comfortable in confirming institutional awards where there is some assurance that a neutral body has fairly referred both the procedural and substantive controversies which invariably arise during the course of arbitration proceedings. • Difficult to enforce a default award – was due process accorded to the defaulting party? • Care must be afforded to drafting Ad hoc clauses as there is no administering body on hand to point out errors and attempt to fix them. • What if the parties do not cooperate? • Too much flexibility could lead to inappropriate procedures being adopted. • Are they really cost effective?

46. Advantages of Institutional Arbitration • Ease of incorporating by reference the institution’s rules in an international contract. • Clear set of rules • Model clauses stood the test of time • Arbitrator selection – Parties are spared the burden of negotiating a fee for services with their adjudicator – Less embarrassing and difficult situations can occur. • In ad hoc arbitrations it is more difficult to monitor arbitrators’ hourly billing also there could be cases of abusive arbitrators attempting to re-negotiate fee arrangement to include cancellation indemnity. • Disclosure and Challenge procedures are provided for the institution to remove and replace any arbitrator nominees whose independence is challenged by a party. • Professional Staff available to guide disputants through the arbitration process. • Arbitral institutions have received the increasingly favorable recognition of national courts.

47. Disadvantages of Institutional Arbitration • Costs are the prime factor. Are they? • Arbitrators may prefer ad hoc arbitrations • Can fix their own fees and conditions. • Avoid administrative constraints of institutional arbitration • In-house counsels’ belief that ad hoc arbitration provides greater control over the process: • “institionalised procedures can become costly and bureaucratic without proper oversight and management by the parties.”Earl McLaren Journal of International Arbitration Volume 19 Number 5 (2002) pages 473 to 490. • Some believe that institutions are very bureaucratic and hinder the dispute resolution process. • Confidentiality could be an issue. • Arbitrators are remunerated less favorably and they do not put in the amount of effort compared to an ad hoc arbitration. • Some believe that institutions only look after their own interests.

48. Legal Framework of Arbitration in China • Statutes • Civil Procedural Law (1991, 2007) (“CPL”) • Arbitration Law (1994) (“AL”) • Judicial Interpretations • SPC Interpretation on Several Issues regarding the Application of the PRC Arbitration Law (2006) (“SPC 2006 Interpretations”) • International Convention • Convention on the Recognition and Enforcement of Foreign Arbitral Award (“New York Convention”)

49. Dual System of Arbitration in China [I] Foreign-related elements: (i) either one or both of the parties is a person with foreign nationality or a stateless person, or a company or organization domiciled in a foreign country; (ii) the subject matter of the dispute is situated in a foreign country; or (iii) the legal facts that establish, change, or terminate the civil legal relationship between the parties take place in a foreign country.

50. Dual System of Arbitration in China [II] • Different Treatments of Domestic Arbitration and foreign-related Arbitration under PRC Arbitration Law: • Arbitration Place/Place of Oral Hearing • Arbitration Language • Nationality of Arbitrators • Applicable Law • Judicial Review • Domestic awards: substantive and procedural review • Foreign-related awards: merely procedural review