Investing in China is not without risk. The challenges are as great to foreign investors today as in the past. From my perspective, while China's admission to the World Trade Organization (WTO) has set certain fundamental trends in motion, it will be a long time before China itself adopts a more transparent structure. The lack of transparency is a real concern, so foreign investors need to carefully structure their deals and monitor activities in China. This article describes how a foreign investor can "even the odds" when doing business in China by anticipating how to handle problems and disputes.
When advising American, European and Asian companies looking for foreign direct investment opportunities in China, questions always arise about how to resolve disputes. there are three particularly critical questions that must be addressed when negotiating a contract or joint-venture agreement with a Chinese party. First, should you insist upon international arbitration as the best way to resolve a dispute? (The alterative is relying on the Chinese legal system.) second, if you choose arbitration, should the proceedings be conducted inside Mainland China, or would another venue be better? Third, and perhaps most important, if you "win" the arbitration and receive an arbitration award in your favor, how do you enforce the award?
The answer to the question about whether to arbitrate or use the Chinese courts is now well settled. Unless Chinese law mandates resolution within the Chinese judicial system, I advise foreign investors in China that they are almost always better off arbitrating their disputes. Although China has made some strides in recent years in improving its legal system, its judiciary tends not to be independent from other governmental functions. This is a concern for outsiders. As a result, arbitration is the better option.
Anticipating that a dispute could arise with a Chinese party (whether a company, an individual or a government entity), where would it be most advantageous, from the foreign investor's point of view, to hold the arbitration? If possible, I strongly recommend that contracts with Chinese parties provide that disputes be arbitrated outside of the People's Republic of China. Of course, this is a matter of negotiation. While in the past, Chinese partners and enterprises were reluctant to participate in arbitrations conducted outside of China, (and, in some cases, were prohibited from doing so), this is less often the case. This change is a direct reaction to the pressures placed on the Chinese by foreign investors and their lawyers. When an arbitration venue will be outside of Mainland China, there are many possible venues in existing arbitral organizations. For example, the Singapore Centre for International Arbitration (SIAC), has lobbied hard to have itself designated in international contracts as a forum for arbitrations that may include Chinese parties.
This brings us to the third question most commonly asked by foreign investors in China. If you are successful in receiving an award against a Chinese party issued outside of Mainland China, where would you most be likely able to enforce that award? The answer is of crucial importance because, as every lawyer knows, having a judgment in your favor is useless unless it can be enforced.
Any real gambler in Macau, Las Vegas, or Monte Carlo knows the mathematical odds of winning, regardless of the game being played. The same should be true for those who choose to arbitrate their disputes. While impressions are important, what really counts are the hard facts. Until recently, there was no single location where it was necessarily best to enforce an award. We may now have an answer because statistics on the enforceability of awards are now available from the Hong Kong Judiciary. These records offer real insight into the enforcement process. They not only show how many applications were filed to enforce an award, they show how many challenges were made to the awards and then, how many awards were ultimately set aside for one reason or another.
Statistics for the years 1997 through Septemher 2003, suggest that approximately 168 applications for enforcement were filed with the courts in Hong Kong. All involved a respondent from the People's Republic of China or Hong Kong. Some applications were to enforce foreign awards (i.e., those granted by tribunals outside of China and Hong Kong) and others to enforce domestic awards (those granted in arbitrations held in Hong Kong and the People's Republic of China).
The results are a pleasant surprise for those who think it is difficult to enforce awards in China. In short, only seven awards entered by the Hong Kong Judiciary between 1997 and September 2003 were set aside. In other words, 96% of the awards were enforced! This is objective proof that arbitrating disputes with the Chinese is not an unproductive undertaking. Indeed, the likelihood of enforcing an award against a Chinese party is quite high.
For example, in 2002, nine international arbitral awards were brought to Hong Kong for enforcement. These included three awards from proceedings before the London Maritime Arbitrators Association, one from the Grain and Feed Trade Association in London, one from an American Arbitration Association proceeding in California, one from an ICC arbitration in Geneva, one from the International Court of Arbitration in Paris, another from the Korean Commercial Arbitration Board, and one from an arbitration in Sweden. Out of nine awards, only one was challenged and, even in that case, the court upheld the award. Thus, all nine applications to enforce awards involving Chinese parties were granted.
Also in 2002, there were 14 applications to enforce arbitral awards that would be viewed as domestic (i.e., either handed down in HongKong or by arbitral operating commissions in Mainland China). Of these, seven were administered by the HKIAC; five were administered by the China International Economic and Trade Arbitration Commission offices in Beijing, Shenzhen, and Shanghai; and two were the result of proceedings before the Shanghai Arbitration Commission and the Nangtong Arbitration Commission. Of 14 applications for enforcement, only two were challenged by motions to set the awards aside. In the end, no awards were set aside.
Viewing the total results in 2002, out of 23 arbitration awards sought to be enforced in Hong Kong, none of the three challenges to the awards was successful. While this may not be a representative year, it nevertheless suggests that Hong Kong is a worthwhile venue in which to enforce an award involving a Chinese party. Thus, when drafting agreements involving Chinese parties counsel should carefully consider Hong Kong as an option.
Seven Additional Reasons to Consider Hong Kong as a Venue
Putting aside for a moment these favorable statistics, I have seven additional practical reasons why foreign entities doing business in China should seriously consider designating Hong Kong as the venue for arbitrating Chinese-oriented disputes.
1. It is widely believed that foreign investors are at a disadvantage in arbitrations held in China. This is not necessarily true. The Hong Kong Special Administrative Region, although clearly a part of the People's Republic of China, represents a kind of neutral ground where both Chinese and foreign investors can feel comfortable. At the HKIAC, Mr. To said that, in recent years, he has observed an increasing willingness on the part of Chinese parties to cooperate with other arbitral tribunals in Asia and elsewhere in enforcing awards. Thus, he believes it pays to look at the HKIAC because the Mainland Chinese recognize Hong Kong's role in the arbitration process.
A foreign investor should be cautious if, in a negotiation, a Chinese party refuses to consider Hong Kong as a venue for commercial arbitration and insists on the province or city in which it resides.
2. Having witnesses available to testify at arbitration hearings can be a logistical nightmare. This is especially true if the witnesses are Chinese and need to obtain visas to travel outside of China to participate in an arbitration hearing in another country. Holding an arbitration in Hong Kong largely eliminates that problem. Hong Kong immigration officials, who must approve travel for such purposes, are normally quite cooperative with requests from witnesses who live on the Mainland to travel to Hong Kong. This is not the case if Chinese nationals need to testify in an arbitration elsewhere outside the Mainland. Also, the cost of traveling from the Mainland to Hong Kong is less than going elsewhere outside China.
3. Hong Kong has a strong, historically impartial judicial system in place. As a result, the Hong Kong courts act independently of the Chinese government when deciding commercial disputes. Also, if injunctive or other special relief is sought in an arbitration proceeding, the Hong Kong judiciary is equipped to quickly deal with these requests. This is not likely to be the case in Chinese courts on the Mainland.
4. Finding impartial arbitrators who can speak English and Chinese is easy in Hong Kong. The HKIAC and other established arbitral organizations with facilities in Hong Kong maintain lists of qualified arbitrators. (The American Arbitration Association has a Cooperation Agreement with the HKIAC, which provides that each organization will provide assistance to the other in connection with the provisions of arbitration services.). Even if the parties select arbitrators who are outside of Hong Kong, it is easy for those arbitrators to come to Hong Kong without having to obtain a special work permit. Also, for a single arbitration, there is no tax assessed on awards in Hong Kong.
5. Hong Kong is home to many qualified solicitors and barristers. Even so, a lawyer from anywhere in the world can travel to Hong Kong and handle a case without the need to appoint "local co-counsel." This means that a foreign investor in China can use its own lawyers if it so chooses. Some other arbitral venues in Asia discourage foreign attorneys from representing their clients there and may even prohibit them from doing so.
6. Privacy is often a key factor for the parties to an arbitration. When privacy is important in an arbitration with a Chinese party, Hong Kong could be an ideal location since it permits the parties to limit external disclosure of confidential information and even disclosure of the existence of the arbitration itself. As Christopher To of the HKIAC said, "You will not find any media coverage of high profile cases or arbitrations in the press. If you want confidentiality, go to Hong Kong."
7. Finally, the UNCITRAL International Arbitration Rules are widely used in arbitrations conducted in Hong Kong. Indeed, Chinese parties will usually accept these rules as a basis for an arbitration. This should give some comfort to foreign investors in China.
Conclusion
What executives around the world demand regardless of their nationality or business is a high degree of certainty in predicting the outcome of any given situation. This is particularly important when you are involved in business with a Chinese party. Again, it is a matter of predicting the odds. If you do business in China, at some point you are bound to become involved in a dispute that will require the help of an outside arbitrator. In my view, Hong Kong offers some truly unique advantages, particularly its strong record of enforcing arbitral awards against Chinese parties. Knowing this can go far toward evening the odds of a successful venture.
By Unkovic, Dennis |
