China CIETAC Arbitration: Different but Fair

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Every year, an increasing number of Chinese companies — especially Chinese State Owned Entities (SOEs) and other government companies — require their contracts with foreign companies provide for disputes to be resolved via arbitration in China. In these situations, we are seeing mostly CIETAC arbitration clauses.

Many of our clients “freak out” about the idea of having to arbitrate in China, with their concerns usually focusing on their ability to “get a fair trial” in a case between a Chinese company and a foreign one. My law firm’s international dispute resolution lawyers (who have won plenty of cases before CIETAC) usually explain how in our experience (and from what we hear from our lawyer friends), the fairness issue is less important than how Chinese arbiters (be they judges or arbitrators) view cases, as compared to American and European arbiters. We then usually  talk about how Chinese courts “tend to look much more at the equities of a case (as opposed to the law) than do American courts,” and that is even more true of Chinese arbitrators.

With equity being so central, it is critical for potential litigants to get away from viewing  cases strictly on the law and start looking at it them from an equitable perspective as well. This means you must ask who in all fairness should win and whose winning would be best for the people of China?

Many years ago, an American company asked my firm to “compete” for a relatively large China arbitration matter by setting forth the strategy we would employ in their case. We set forth our strategy, which stressed trying to settle the case as quickly as possible because we did not see much likelihood of winning it. The American company gave the case to another law firm, explicitly telling us they would have hired us, but they could not get past the fact that the other firm was confident about winning while we were confident about losing. I argued a bit with the in-house lawyer of this American company, explaining how even though this other firm (and he himself) were convinced they would prevail because of the law, we were equally convinced they were going to lose because of the equities involved.

The case went to arbitration and the American company lost big.

Just this week my law firm secured a seven figure arbitration award in a CIETAC arbitration (conducted in Chinese) on behalf of an American company against a Chinese company, helping us maintain a perfect record both in predicting the results of China arbitrations and in prevailing in them. Without a doubt, one of the keys to this victory was our lawyers (not me) accounting for the equities in deciding to bring the case and in emphasizing the equities at the arbitration itself.

I have been called to testify before Congress next month regarding how foreign companies are treated in China. One of the things I plan to discuss is how American companies oftentimes mistake “the Chinese way of doing things” for bias. I will use China arbitration and litigation as an example of this. I am not going to claim foreign companies are always treated fairly in China because they clearly are not (and we have been saying this since we started this blog in 2006). But I am going to talk about the importance of distinguishing between what truly stems from bias and what stems from American misunderstandings of how China operates for everyone, Americans and Chinese alike.

What do you think?

2 responses to “China CIETAC Arbitration: Different but Fair”

  1. Very interesting and informative article from the CLB once again. I plan on learning more bout CIETAC today. Very helpful to me because typically my ‘gut feeling’ would say oh boy lets not have to result to the Chinese court/arbitration system, (although I have also heard that the fair treatment of western companies is crucial to foreign investors’ rights and therefore continued involvement, this gives me some added level of comfort. To me this is a classic case of “The more I learn, the more I find out I didn’t know anything.” On a slightly different but related subject, it is frustrating to have to use Letters of credit because they are only concerned with bank documents. This makes any kind of import deal a huge risk from my point of view. Thanks Dan!

  2. Interesting article. Unfortunately, arbitrating and winning the case in China will be one thing and enforcing such foreign-related awards – another. My experience shows that even with the Prior Reporting System mechanism intended to safeguard foreign-related awards (great as an idea), there are numerous deficinecies – for example lack of clear time-limts for the courts involved to make a decision or limited information disclosure. Anyone experienced with Prior Reporting System on the way to enforce the award?

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