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Dispute resolution is big business in China

The Financial Review - 28/04/2006, Page 58
By Colleen Ryan

China is witnessing a proliferation in arbitrated disputes, which is creating a number of openings for Australia, writes Colleen Ryan in Shanghai.

When the two French giants, LVMH and Carrefour, slugged it out in the Shanghai No. 2 Intermediate People's Court last week over the sale of fake Louis Vuitton handbags in supermarkets, it was greeted as a rare event in China.

The reaction had little to do with intellectual property rights violations. That is a fact of life in China. It was more that there was a high-profile, corporate legal dispute before the courts at all.

Big companies tend to avoid the Chinese court system if they can. Arbitration is the preferred method of handling disputes. As the economy grows, so too does the incidence of corporate disputes, and the outlook for the arbitration industry is extremely bullish.

Australian arbitrators are now starting to penetrate the market - albeit in baby steps.

The Institute of Arbitrators and Mediators Australia will start training Chinese arbitrators later this year. And under an agreement signed with the Shenzhen Arbitration Commission, the third largest in China, Australian arbitrators can now be appointed to its arbitration panels.

" It is just a first step," IAMA president Tim Sullivan says. "They looked around the world and thought our training was the most appropriate." The first group of trainees will arrive in Australia in October. At the very least it will give one arm of the Chinese arbitration system exposure to what Australia has to offer in the field.

There are now 189 local arbitration commissions (LACs) in China, of which Shenzhen is one of the largest. There is also the China International Economic and Trade Arbitration Commission, set up in the mid-1990s to deal with foreign-related disputes.

All China's arbitration commissions are now permitted to deal with foreign entities, but CIETAC is the biggest. It handled 979 cases last year. It has the additional advantage over LACs in that selected arbitrators do not have to be a member of a pre-approved panel.

Since China's economic opening up in 1978, the most common method of arbitration - where a foreign company is involved - has been based offshore, usually in Hong Kong or Singapore. But this is changing because corporate structures are changing.

" A lot of companies have now decided to become wholly foreign-owned enterprises, or WOFEs, for tax and other reasons - that makes them a PRC [People's Republic of China] entity," Hong Kong-based Baker and McKenzie partner Andrew Aglionby says. "If there are two WOFEs dealing with each other that means two Chinese bodies and they will need to use domestic arbitration."

As long as one side of the transaction is a foreign company or entity, offshore arbitration is permitted. But, these days, even where a foreign-registered entity is involved in the transaction it may still mean domestic arbitration.

" There is now a great insistence by Chinese companies to have either, or both, PRC governing law and a PRC-based arbitration," Aglionby says. It is little wonder that companies opt for arbitration. China's court system has a chequered past. Until 10 years ago, most judges had no legal training - they were retired military and police officers or government bureaucrats. They are still appointed and paid for by the various local governments and are treated as just another government official. There is little tradition of judicial independence. The situation has improved markedly over the past decade, however.

" The government made a huge effort in the late 1990s to improve the quality of judges," Shanghai-based Allens Arthur Robinson partner Seamus Cornelius says.

" They made sure they had law degrees, or at least had training, and really lifted the standards across the country. So the judges now are younger, smarter, much more commercial, they are a totally different generation. They have changed the generation in just a few years."

Nevertheless, the government is responding to the demand for arbitration.

" The fact that they set up CIETAC is a very clear indication they were aware that there was a lack of confidence in the court system," Cornelius says. "They established a brand-new arbitration body specifically set up to deal with foreign-related disputes because what they were finding was that no one trusted the PRC courts and there was no recognised arbitration body in China that people could go to."

" You can now have an arbitration in Shanghai or Beijing or Guangzhou under CIETAC with an Australian judge sitting there as one of the arbitrators."

Chen Zhidong of Fudan University Law School in Shanghai believes arbitration will grow in China. "The big advantage is that parties can appoint arbitrators - they can choose those who are specialised in corporate law or a particular commercial transaction, those that have some factor of credibility.

" Also, once a case has been arbitrated the decision is final - parties can apply to the court only on procedural or enforcement matters. It avoids a waste of time and a waste of money."

And the track record for enforceability of decisions? "If you are dealing with a larger, reputable Chinese company it is just the same as dealing with a large reputable company in Australia," says Cornelius.

We gratefully acknowledge the permission from Colleen Ryan and The Financial Review to reprint this article.