China: China Watch: Arbitration in India and China—Concerns and Options

India is now the fourth largest economy in the world and the second fastest growing economy in the world. With consistent 7% growth during the past few years it is chasing and catching the Chinese Dragon, which is trying to depress a growth rate of 9+% to avoid overheating. Both economies desire and require foreign investment. A major driver of foreign investment is the comfort level foreign corporations feel in the country, directly influenced by the rule of law and, more specifically, a good exit strategy in the event of an unsuccessful venture. Exit strategies include litigation and—more frequently in the modern world—arbitration. This article briefly examines the current arbitration regimes in India and China and provides some thoughts about better protections for the foreign investor. Fortunately, in both countries, domestic private companies increasingly agree to arbitrate abroad. For government contracts requiring domestic arbitration, foreign contractors still need to structure the contract and the project to avoid litigation.

The domestic arbitration body in India is the Indian Council of Arbitration. Whether within the confines of that specific organization or a domestic ad hoc arbitration, the results have been very similar: prolonged hearings and delay in obtaining awards and final judgments. The 1940 Arbitration and Conciliation Act was amended in 1996, and the new Act was heralded as a vast improvement over the old act. In practice, the results have been less than satisfactory. There has been little improvement in the duration of arbitrations.

Indian arbitrations may suffer delay for a number of reasons. Indian court custom is to argue in laborious detail every aspect of the evidence, often over a protracted series of hearing sessions. Senior advocates and their solicitors have no incentive to speed matters along and frequently will put other business first, meaning that hearings are scheduled outside the times when the Indian courts are in session. This results in evening or weekend hearings, often only a few hours per session, with loss of continuity between the sessions. This, too, results in extended hearings because of the need to retread the same issues to refresh the arbitrators’ recollection about the facts and the evidence. Finally, the arbitrators themselves are often locked into the model of the Indian court system. They are not interventionist and may allow hours of hearing on spurious issues, or refuse to impose necessary restrictions on the parties and counsel to insure that the hearings progress at a reasonable pace.

More recently, the Indian arbitration system, and more specifically the 1996 Act, were undermined by a few decisions that suggest that the grounds for appeal from an arbitration decision are broader than those specified in the Act. The cases raise the specter that an appeal may address the merits of the underlying award. As a consequence, more arbitration awards will be mired in the court system on appeal. This circumstance raises serious issues about the length of time it will take to conclude a matter through appeal, and how this protracted process may impact the return on any favorable award.

In April 2005, the CCPIT amended the CIETAC arbitration rules adopting many of the concepts embodied in the UNCITRAL rules. Additionally, CIETAC now has increasing competition from local arbitration commissions, such as the Shanghai Arbitration Commission. These developments are likely to positively impact CIETAC, in time.

However, currently, CIETAC still retains a reputation for being slow and not having a strong panel of arbitrators. The fees offered are such that many foreign arbitrators are unwilling to serve. Additionally, CIETAC is currently sorting out accusations made against its Secretary-General, Wang Shengchang, relating to alleged corruption. Though many seem to believe these allegations may be the product of Mr. Wang’s recent vote against a Chinese company in Stockholm, the end result is the same, an arbitral body hindered by its own internal politics.

Foreign companies have had mixed results in CIETAC. However, traditionally many foreign companies agreed to the venue because of the increased likelihood of enforcement of a CIETAC award over a foreign award. CIETAC awards do have a greater likelihood of enforceability. Certain awards by foreign arbitral bodies have recently been successfully challenged. Moreover, enforcing a foreign award against a Chinese party in PRC courts will at a minimum prolong enforcement and encourage settlement to avoid a protracted and uncertain enforcement proceeding.

Traditionally favored venues for arbitration, such as ICC and LCIA, are hindered in these markets because of issues surrounding the enforceability of their awards and the unrestrained inclination of domestic court judges to sanction intervention in the process. In a case last year, a Shanghai Court held an award from an ICC arbitration seated in Shanghai to be invalid. Such determinations may make appealing to an otherwise well-recognized international arbitration within these countries a poor option. Increasingly Chinese companies have entered the international market and agreed to arbitration in more neutral venues such as Hong Kong (HKIAC) and Singapore (SIAC). CIETAC has established a relationship with HKIAC, and presumably this will help the enforceability and acceptance of HKIAC awards in China. Indian companies will likely increasingly agree to forums outside of India.

However, in the near term, and in the absence of strong leverage, the foreign company negotiating a contract may be forced to accept domestic arbitration of its disputes. At the time of drafting the arbitration clause, the foreign party needs to think creatively about ways to institute additional protections if the domestic party insists on the domestic arbitration body. Some of these options include:

• Amend the arbitration clause to include a fee shifting provision. Making the loser pay for the costs of the arbitration and attorneys’ fees will go along way toward discouraging the parties from pursuing arbitration. Further, shifting fees will tend to discourage frivolous counterclaims.

• If the foreign corporation fails to obtain fee shifting for the arbitration itself, at a minimum, the company can insist that the fees shift to the appellant loser at the appeal stage.

• It will be particularly beneficial to specify the agreed pre- and post-award interest amounts in the agreement. Obviously, neither party should make the interest so high as to be usery in that jurisdiction.

• The parties might also consider a sliding scale agreement. Disputes below $5 million will be subject to ad hoc arbitration in-country by one agreed upon arbitrator or, in the absence of agreement, a three-member panel. Arbitration will be subject to fast-track resolution, and in no event is to exceed a six-month period. A decision will be made on pleadings and affidavits without hearing. Any dispute over $5 million will be subject to arbitration abroad. In this event, the desired venue and administering body should be specified. If the other side resists, the parties can change the scale.

• Include a requirement for mandatory mediation before or at the time of filing any request for arbitration.

• Specify the currency of the award.

• Specify the nature of the award if it will result in more favorable tax treatment.

• Consider carving out interim relief. Be wary that in some jurisdictions invoking the local court for interim relief may undermine the arbitration jurisdiction.

• Make sure that your panel choice is not limited to the local arbitration body’s list of arbitrators. Agree that arbitrators outside the list may be chosen.

• Insist that the presiding arbitrator be from a third country not of the same nationality as either party. Write this into the agreement.

These arbitral institutions will continue to develop, and hopefully become credible alternatives for international investors. Until this scenario arises, consider an off-shore arbitration body in a neutral venue. If that fails, incorporating additional protections may decrease the costs of the exit. None of these proposed additions will assure a speedy or favorable result, but they may discourage the parties from resorting to arbitration and assist in mitigating the costs when arbitration arises.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.