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The delicate art of arbitration

Author: Jerome A. Cohen, Adjunct Senior Fellow for Asia Studies
November 29, 2005
Financial Times

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Contract negotiations between foreign and Chinese companies frequently stall over dispute resolution. Both sides may prefer arbitration to litigation. Yet it is not uncommon for foreigners to insist on arbitration outside China, while the Chinese side holds out for the China International Economic and Trade Arbitration Commission (Cietac).

One solution would be for the parties to agree to settle disputes before one of the local arbitration commissions now established in virtually every large and medium-sized Chinese city. Since 1998, LACs have been authorised to handle foreign-related disputes as well as domestic ones.

Chinese companies will often be delighted to resort to an LAC, especially one in their city. But would it be wise for the foreign party?

Geographic convenience is usually the best argument. But foreign businesses are unlikely to embrace this option unless measures are devised to eliminate “local protectionism”—interference with the decision-making of the panel by local government, Communist party, business and personal influences.

Significant changes would be required in both the rules and practice of an LAC for local protectionism to be overcome.

The LAC must assure foreign companies of the widest choice with respect to the arbitrator to be appointed by the foreign side, and also the presiding arbitrator to be agreed on by both parties. Currently arbitrators must be selected from the LAC’s roster.

Cietac recently changed its rules to allow the appointment of arbitrators not included in its roster, but with an important limitation: the appointment must meet the approval of Cietac’s chairman, and no clear criteria have been stated to guide his decision.

Any LAC that hopes to compete seriously with Cietac for foreign business should go beyond Cietac’s compromise and permit the parties to make selections without regard to the LAC’s roster and without requiring LAC approval. If a LAC wants foreign business, its rules should also outdo Cietac’s by requiring that, unless the parties agree otherwise, the presiding arbitrator must be from a third country. The LAC, as the Beijing Arbitration Commission has done, should refrain from appointing members of its own staff as arbitrators.

The LAC must also enforce strict ethical rules for arbitrators, the parties and their advocates and the entire commission staff.

The example of the Beijing commission suggests it may be possible for LACs in big commercial centres to offer foreign companies a credible alternative to Cietac. Yet the Beijing commission itself may have difficulty abandoning its roster of arbitrators without the support of the State Council, which supervises the development of LACs. China’s 1994 arbitration law may have to be revised to accomplish these changes.

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