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Arbitration In Your China Contract. Adult Supervision Required.

By Dan Harris and Steve Dickinson

With sushi restaurants, it's the yellow fin. With new houses, it's the windows. With international contracts, it's the dispute resolution provision. The "it" I am talking about is the one easiest, fastest, most accurate, way to judge whether something is good or not. And the way I judge international contracts is by heading straight to the dispute resolution provision. The well crafted provision is, above all else unambiguous. If it calls for litigation, it says where it will be and what law will apply. And it says who will pay for it and under what circumstances. If it calls for arbitration, it says where it will be, how many arbitrators will be required, how the arbitrators will be chosen, the language of the proceedings, and the law that will apply. And it says who will pay for what. The above are minimums. I am heartened to see I am not the only blogger obsessed by these provisions. My friend, Santiago Cueto, of International Business Law Advisor, recently did his own post on international dispute resolution clauses, entitled, "7 Ways to Bulletproof Your International Arbitration Agreement." Santiago starts out by setting forth some very sound reasons as to why arbitration usually makes sense in international contracts:

As an international business attorney, a focal point of my practice involves advising clients how to best handle cross-border disputes. The most effective mechanism by far in resolving international dispute is international arbitration. Why? International arbitration levels the playing field by taking away the home court advantage of parties on either side of a transaction. But the most attractive aspect of arbitration is that the awards issued by an international arbitration tribunal will receive worldwide recognition by countries that are members of one of the international conventions on the enforcement of tribunal awards.

I would add, however, that in dealing with China, there are definitely times where litigation may be preferable to arbitration. In particular, if we see in-China IP or trade secret violations as being the the biggest threat to our client, we oftentimes choose a Chinese court as the forum for dispute resolution. Also, there are times where you want to make dispute resolution as difficult, as expensive, and as drawn out as possible so as to dissuade your counterpart from ever engaging in it. In those instances also, arbitration may not make sense. Santiago then sets out a nice checklist on how to "bullet-proof" an arbitration clause:

1. Be Unambiguous. Unequivocally state that any dispute will be resolved through arbitration e.g. ?Any dispute or difference arising out of or relating to this agreement shall be finally resolved by arbitration ?? 2. Be Clear. Define whether arbitration is to be preceded by negotiation or mediation and designate a time frame e.g. ?If no agreement has been reached within __ days of the delivery of written notice of the existence of a dispute, either party may serve a request for arbitration ??. 3. Be Specific. Specify the administering institution and the rules to be applied e.g. ?The arbitration shall be administered by the International Center for Dispute Resolution in accordance with its International Arbitration Rules. 4. Be Careful. Carefully select the site of the arbitration taking into consideration the quality of its arbitration jurisprudence and the respect of its courts for the arbitral process. e.g. China, no. Hong Kong, yes. 5. Be Meticulous. Meticulously set forth the number of arbitrators on the panel and how they will be selected. Choose an arbitrator who demonstrates communicative proficiency, a firm appreciation of the rules of evidence and an acknowledged expertise in the industry in which the dispute arose or about the issues in dispute. 6. Be Heard. Designate the language of the proceeding. It is unsettling how many times parties overlook this provision and are forced to rely on a foreign translator to communicate every word of the proceeding. 7. Be Final. In order to prevent further review and appeals of an arbitral award once it is rendered, you must include a statement in the arbitration agreement that clearly states that the award is final e.g. ?The arbitral award is binding, final, not subject to review, and not subject to appeal by the courts in any jurisdiction." This provision is particularly essential in jurisdictions where the laws allow parties to appeal an award issued in that country.

I disagree with Santiago's stating "China, no" as there will definitely be times when you have no choice but to say yes to China arbitration. In those situations, you should call for the language of the arbitration to be in English and you should require that as many of the arbitrators as possible come from outside China. If you have an English arbitrator and your arbitration is in English, applying the laws of England, it hardly matters that it may be taking place in Shanghai under CIETAC and not in Hong Kong. Bottom Line: Arbitration provisions often end up being the most important provision in your contract so give them the strategic thought and consideration they deserve.

Full post as published by China Law Blog on February 02, 2010 (boomark / email).