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Another year of record levels of foreign direct investment in China shows that the world’s investors continue to place their bets on that country. But what happens when the gamble leads to problems? Doubts about the fairness and competence of Chinese courts have often dissuaded foreign investors from pursuing litigation to solve disputes with Chinese parties. While fighting it out in a foreign court may yield a fairer judgment, Chinese law prohibits parties from submitting certain disputes to foreign courts, including those arising out of Sino-foreign joint ventures. Also, the paucity of relevant bilateral treaties and judicial assistance agreements between China and such countries as the United States, Britain, Germany and Japan complicates the enforcement of a foreign judgment. Consequently, an overwhelming majority of international investors in China have turned to arbitration to resolve disputes. As with the country’s laws and business practices, arbitration in China has made tremendous strides toward meeting international standards, with the China International Economic & Trade Arbitration Commission (CIETAC) taking a prominent part in this development. There are, however, many elements of Chinese arbitration and CIETAC proceedings with which foreign parties should familiarize themselves. Venue, for example, depends partly on the nature of the contract. Contracts with a foreign element — those involving foreign parties, foreign location of properties or foreign place of performance of contracts — are permitted to request arbitration both inside and outside of China. Significantly, Sino-foreign joint ventures and wholly foreign-owned enterprises are not viewed as foreign parties. Parties to a contract with a foreign element may also choose the governing law of the contract, except in certain cases such as Sino-foreign joint venture contracts and natural resources contracts. Disputing parties can only choose arbitration with a valid arbitration clause or agreement. An arbitration clause must contain wording that spells out an intention to apply for arbitration, the matters to be raised in arbitration and a designated arbitration committee. The parties must reach a supplementary agreement if there is no clear provision in the arbitration agreement addressing these issues or the arbitration agreement will be deemed void. Taking into account that it may be difficult to reach a supplemental agreement once a dispute has arisen, it is imperative that the arbitration clause in a contract complies with the stipulations of the PRC Arbitration Law, particularly in terms of providing the arbitral institution of choice. In China, the application for property preservative measures or measures for the protection of evidence may only be submitted to the relevant arbitration institution either after or at the same time that the dispute is recognized or accepted by such an institution. There are no remedies to protect the party’s interest prior to the acceptance of the case. Thus, if claimants need to preserve property or evidence, they must file a case at an arbitration institution as soon as possible. Whether a dispute is foreign-related or domestic in nature can have serious ramifications in regards to the arbitration award, with the difference in the review and supervision of the arbitral award by the judiciary. A dispute arising from a Sino-foreign joint venture contract between the Chinese and foreign partners of the venture is considered a foreign-related dispute. A dispute between a joint venture and a wholly foreign-owned enterprise or a dispute between a joint venture or a wholly foreign-owned enterprise and wholly Chinese-owned domestic company is deemed a domestic dispute. Domestic arbitral awards are subject to judicial review both on the merits (issues such as major facts findings) and the procedures (issues such as presence at the hearing and opportunities to present arguments) of the case, while foreign-related arbitral awards are only subject to a review on procedure. As such, parties may not challenge a foreign-related arbitral award on the grounds that determinative evidence was forged, while they can do so when challenging a domestic award. As a member of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), China has a clear obligation to recognize and enforce arbitral awards rendered from the 135 contracting countries to the convention, which includes the home countries of many of China’s foreign investors. Arbitral awards made in China may also be enforced in those countries. Claimants can commence enforcement by confirming the type and location of the respondents’ properties and applying to the local courts where the respondent’s properties are located for the enforcement of arbitral awards. In recent years, a pro-enforcement policy for arbitral awards has been established, with the particularly significant development of the “prior reporting” mechanism for the recognition and enforcement of foreign-related arbitral awards made in China. With this mechanism, a lower People’s Court may rule to refuse to enforce a foreign-related arbitral award made by a Chinese arbitration institution, such as CIETAC, only after receiving confirmation from the Supreme People’s Court (SPC). The aim of the mechanism is to eliminate the local protection for the debtors. There are no officially published statistics on the number of submissions from local courts to the SPC for approval to refuse the enforcement of a foreign-related arbitral award. But the speculation is that there are about 10 such cases per year, and not all are able to obtain approval. Significantly, the “prior reporting” mechanism does not apply to domestic arbitral awards or those based on cases that do not involve a foreign element. In the interests of professionalism and a neutral venue, many foreign investors in China still prefer foreign arbitral institutions, such as the ICC International Court of Arbitration or the Arbitration Institute of the Stockholm Chamber of Commerce. However, Chinese companies unfamiliar with international institutions will generally demand a domestic arbitration commission. Depending on the circumstances and negotiations, the Chinese party can at times be persuaded to agree to the Hong Kong International Arbitration Center. The option most commonly settled upon, however, is CIETAC. Founded in 1956, CIETAC is able to arbitrate foreign-related and domestic commercial disputes without any limits regarding the parties’ business or nationality. The commission has handled more than 9,000 international arbitration cases involving parties from more than 45 countries and regions. Although most foreign-invested enterprises in China currently stipulate that disputes be settled through CIETAC arbitration, there are a number of notable differences between the arbitration practices of CIETAC and those of international institutions with which foreign parties should be aware. Traditionally, CIETAC arbitral panels had to be comprised of arbitrators from the CIETAC arbitrators list, a requirement not found in any other of the world’s arbitration institutions. This restriction, however, will be abolished after a draft revision of the CIETAC rules takes effect on May 1. Parties to a dispute will then be permitted to freely appoint an arbitrator from the panels. In the meantime, it would behoove those interested in utilizing CIETAC arbitration to review the list of arbitrators for individuals they could trust in case disputes arise. Parties are free to select the language of the arbitration proceedings, which applies to the documents to be submitted, the language used to conduct the proceedings and the rendering of the award. A preference for specific or multiple languages must be indicated in the arbitration agreement. Where there is no agreement on the arbitration language, the official language of the arbitral institution — Chinese — will apply. In a move to expand its services, CIETAC in May 2003 issued its Financial Disputes Arbitration Rules, along with a Panel of Financial Arbitrators, which provide a more expeditious and less costly method for resolving financial disputes. Under these rules, an arbitral award shall be made within 45 working days after the constitution of an arbitral tribunal — which usually takes nine months — unless otherwise agreed to by the parties. Parties could also possibly save 50 percent on the cost. For the financial rules to apply, the parties must have specifically provided for them in the arbitration agreement. It is clear from the numbers that foreign companies have not yet taken to these new rules. In 2004, the financial rules were applied to only three cases, including two that were foreign-related. Two drafts released by China’s SPC in 2003 and 2004, respectively, represent the most significant action by the SPC in recent years regarding arbitration. Developments include a broader interpretation of valid arbitration agreements and guidance on how to deal with abnormal clauses. Additionally, PRC laws, for the first time, provide explicit rules on the governing law of arbitration agreements. Such laws differ from those that govern contracts themselves that contain arbitration agreements. Under the drafts, if parties do not agree on the law governing the validity of the arbitration agreement, the laws of the seat of arbitration will apply. If parties fail to agree upon the seat of arbitration, then the laws of the seat of courts will apply. The implication of the drafts is that parties may select countries whose laws are more pro-arbitration as the seat of arbitration. Thus, the laws of such countries will apply to determine the validity of the arbitration agreement. While 2004 bore witness to several notably victories by foreign parties in Chinese courts, the judicial system still must face massive reforms before it can become a viable avenue for foreign parties seeking dispute resolution in China. This means the prevalent use of arbitration will likely continue. Relatively reliable and improving, arbitration in China now must be supported by greater efforts in establishing laws for such matters as bankruptcy, which are relevant to the enforcement of arbitral awards. Jingzhou Tao is the managing director of Coudert Brothers’ office in Beijing.

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