Arbitration processes in Asia
February 2011 | TALKINGPOINT | LITIGATION & DISPUTE RESOLUTION
FW moderates a discussion between Matthew Gearing at Allen & Overy LLP, Paul Starr at Mallesons Stephen Jaques and James Kwan at Simmons & Simmons about arbitration processes and facilities in Asia.
FW: Can you outline some of the major trends related to corporate disputes in Asia over recent months?
Gearing: Increasingly parties based in Asia are selecting a seat of arbitration in Asia, rather than looking to historic centres such as London. We have seen an increase in disputes arising from insolvency proceedings following the global financial turmoil of recent years. At the same time we have also seen an upswing in the number of clients seeking advice on possible claims against states arising under bilateral investment treaties.
Kwan: There continues to be work driven by the economic crisis, including disputes and litigation relating to the sale of complex financial products, investigations arising from increased regulatory oversight, labour disputes, and breach of contract matters. There has been a dramatic growth in international commercial arbitration in Asia and a rise in the number of cases administered by arbitral institutions based in Asia. More recently, as Asian economies rebound from the financial crisis, this has caused a surge in exports and outbound investment, which has led to a greater appreciation of the value of arbitration clauses in contracts. As Asian economies recover, companies are likely to arbitrate their disputes as opposed to in 2008 when parties were interested in a quick settlement due to the time and costs involved.
Starr: A major trend is the increasing number of corporate disputes relating to Mainland China. This is natural given the significant amount of foreign investment in Mainland China. The increasing faith in the enforcement of judgments and arbitral awards in Mainland China also provides parties with the confidence to assert their legal rights. In November 2010, we had a Hong Kong judgment recognised by a Shanghai court; we believe the first ever such recognition. There was no protectionism or obfuscation by the Shanghai court, even though the enforcement was by a foreign company against a PRC counterparty. The basis for enforcement is the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters (REJA), which was signed in 2006 and finally became effective in August 2008.
FW: Are you seeing more Asian companies turning to arbitration to resolve their disputes?
Starr: As Asian companies develop a better understanding of and confidence in the arbitration process, we find that our clients are attracted by the degree of control they can have on issues such as the venue and the arbitration panel if they chose arbitration over court proceedings to resolve disputes. Also, where parties do business in Mainland China, there is a preference for arbitration as a method of dispute resolution.
Gearing: Arbitration has been a popular method of dispute resolution in cross border transactions in Asia for some time. Most of the regional arbitration centres have reported an increase in their caseload in recent years. This has fuelled healthy competition between institutions and jurisdictions vying to attract international arbitrations.
Kwan: There are an increasing number of Mainland parties arbitrating in Hong Kong. The willingness of Chinese corporations in taking their disputes to overseas arbitral venues is also an increasing trend. This reflects the amount of Chinese outbound investment which increases year by year, and increased sophistication by Chinese users. Chinese national oil Companies have been investing in areas where international oil Companies have been prohibited from investing or hesitant to do so. There is an increasing amount of Chinese investment in Africa, Central Asia and Latin America where political and commercial risk is high.
FW: In your opinion, which centres in Asia offer a premium forum for conducting arbitration, and why?
Kwan: A survey by Queen Mary University of London, found that the most important factor in choosing the seat of arbitration is the formal legal infrastructure: the statutory framework for arbitration, court support of the arbitral process, and its neutrality and impartiality. This allows arbitrations to be conducted with minimum interference and delay. Both Hong Kong and Singapore fall into this category. Historically, for parties based in Asia, London, Paris or Stockholm have been the preferred locations for arbitration, but increasingly, arbitration clauses now provide for a seat in either Singapore or Hong Kong. For contracts with two Asian parties, Singapore or Hong Kong is the place of arbitration for 90 percent of the time.
Starr: The question assumes a ‘one size fits all’ for arbitrations whereas the real answer lies in the concept of ‘horses for courses’. For example, Hong Kong is most attractive to those doing business in Mainland China and is an acceptable alternative to the Mainland as a forum for arbitration, particularly given the Supreme People’s Court’s clarification on 5 January 2010, that, with certain exceptions, ad hoc arbitral awards and arbitral awards made in Hong Kong by the ICC and other foreign arbitration institutions are enforceable in Mainland China in accordance with the Arrangement concerning ‘Mutual Enforcement of Arbitral Awards between Mainland China and Hong Kong’ (1999) (MEAA). This, together with the shared cultural heritage with Mainland China, an ability to understand Western ways, independent judiciary, excellent arbitration expertise and infrastructure, and liberal jurisdiction which allows foreign lawyers to conduct arbitrations enhances Hong Kong’s value as a venue for arbitration for both foreign and Chinese parties.
Gearing: The most popular seats in Asia are Hong Kong and Singapore. The courts in both are considered pro-arbitration: they are generally reluctant to intervene in arbitration proceedings and have an excellent reputation for upholding and enforcing arbitral awards.
FW: Have there been any significant legal and regulatory developments affecting arbitration over the last year or so?
Starr: I have already mentioned the clarification by the Supreme People’s Court of the MEAA. Another significant development is the new Arbitration Ordinance in Hong Kong which will replace the current one when it comes into effect sometime in 2011. It will abolish the distinction between domestic and international arbitrations which currently exists by creating a unitary regime of arbitration for all arbitrations, based largely on the UNCITRAL Model Law. This will make arbitrations in Hong Kong more user-friendly and accessible to lawyers and the international business community from civil and common law jurisdictions who are already familiar with the Model Law. The new Ordinance also contains provisions additional to the Model Law such as express prohibitions against the disclosure of information relating to arbitral proceedings and awards and the power of an arbitrator to act as a mediator. These developments enhance Hong Kong’s attractiveness as a forum for arbitration.
Gearing: A number of jurisdictions in the region are in the process of updating their arbitration legislation. A new Arbitration Ordinance was enacted in Hong Kong in December 2010 which establishes a unified regime for domestic and international arbitrations under the UNCITRAL Model Law. In India, amendments have been proposed to the Arbitration and Conciliation Act 1996 and consultations are ongoing. It is hoped that if the reforms are implemented this will provide a platform for improving the reputation of India as a seat and the prospects of enforcing awards in the local courts.
Kwan: The Hong Kong Arbitration Ordinance was enacted on 10 November 2010, with a commencement date tentatively set for 1 June 2011. The purpose of the reform of the Hong Kong arbitration law is to unify the domestic and international regimes on the basis of the UNCITRAL Model Law. There will be one arbitration regime without any distinction between international and domestic arbitration. The Ordinance is aimed to be more user friendly for local and international users. Under the previous bifurcated regime, domestic awards were subject to judicial review and appeals on a point of law. The new regime allows recourse to the courts for the setting aside of an award in very limited circumstances. Other jurisdictions such as Vietnam and Australia also updated their arbitration legislation based on UNCITRAL Model Law.
FW: Compared to other forms of dispute resolution, what are the benefits of the arbitration process for the parties involved?
Gearing: The main advantages of arbitration include, first of all, extensive enforceability. The New York Convention provides for the enforceability of arbitral awards across territorial boundaries subject to limited grounds for the local courts to refuse enforcement, and there is no equivalent global regime for the mutual recognition and enforcement of court judgments. Second, it provides finality. In general, awards are binding and final and there is no automatic right of appeal on the merits. Third, arbitration allows flexibility. The parties are free to choose the seat, venue, procedural rules and language of the arbitration. Fourth, it allows neutrality –the parties can choose a neutral venue. Fifth, arbitration provides privacy and confidentiality – the proceedings are usually confidential. The sixth benefit is disclosure. The scope of disclosure in international arbitration tends to be narrower than in English or US litigation proceedings.
Starr: Control, choice and confidentiality are the main benefits. Subject to negotiation, parties have control and the ability to choose matters such as the venue, the arbitration panel, the arbitration rules and the language of the arbitration. They don’t have to wait for a court date and can even control the length of the arbitration by agreeing on a guillotine or chess clock method, thereby minimising the tendency in some arbitrations to chase every rabbit hole. Confidentiality is a big plus since some parties do not like their disputes aired in public.
Kwan: However, arbitration is not always the best option. Litigation should be considered when there are strong courts for the dispute and enforcement, efficient court procedures, purely domestic issues, the ‘dispute’ is likely to be a simple issue that involves debt collection, and the need for precedent.
FW: Are there any downsides to pursuing arbitration in Asia? How can the challenges be reduced or overcome?
Kwan: Delays in the constitution of the tribunal can be mitigated by choosing institutional as opposed to ad hoc arbitration. Parties can agree on a set of rules to regulate the disclosure of documents such as the IBA Rules on the Taking of Evidence in International Arbitration. The IBA Rules can also be incorporated into the arbitration clause to import a familiar regime in arbitral proceedings if parties are required to conduct their arbitrations in unfamiliar settings, such as arbitrations in the PRC. Parties can also reduce delays by minimising written submissions and the length of hearings, and choosing arbitrators wisely.
Gearing: Despite the continuing and growing popularity of arbitration in Asia, challenges remain. There is a propensity for court intervention in certain Asian jurisdictions. In addition, the courts in certain jurisdictions have refused to enforce arbitral awards on grounds which go beyond the terms of the New York Convention. The pool of suitably experienced arbitrators based in the region is comparatively small compared to the market in Europe.
Starr: The downsides of pursuing arbitration are not necessarily limited to Asia. A major negative confronting all arbitrations, regardless of location, is the increasing cost. Globalisation has given rise to complex commercial arrangements so arbitration is no longer the quick cheap fix that it once was. Instead, arbitrations can be as costly as court proceedings because of the complexity of modern disputes, which can involve parties from different countries, documents in several languages, the need to engage a large team of experts and the cost of enforcement in a foreign jurisdiction. Costs can be reduced if parties become more proactive in managing disputes from the start of their commercial relationship.
FW: Does the region need to address ongoing problems with regard to enforcement and/or appeal of arbitration awards?
Gearing: The courts in some jurisdictions have displayed a willingness to engage in a review of the merits. It is therefore particularly important to choose a good seat in order to minimise the risk of an award being set aside by the courts of the seat. When it comes to enforcement, this remains problematic in a number of Asian jurisdictions, including the PRC and India. Delay in enforcement of awards is another problem in many Asian jurisdictions, because often enforcement proceedings are stayed pending the outcome of any challenge to an award.
Kwan: There is a lack of empirical evidence concerning the enforcement of arbitral awards in Asia, especially in the PRC and India. Although most states in the region have acceded to the New York Convention, courts in the region adopt different approaches and interpretations on enforcement, leading to different results. There should be more conferences on the enforcement of arbitral awards involving judges in the region, and judicial training on the application of the Convention.
Starr: The issue of enforcement in the region is a work in progress for not only arbitration awards but also court judgments, particularly given the increase in cross border disputes. However, instead of only focussing on the problems of enforcement, we also need to recognise positive steps taken by countries such as Mainland China to increase confidence in its system through its actions of actually enforcing a recent Hong Kong court judgment, and clarification of the enforceability in Mainland China of ad hoc arbitral awards and arbitral awards made in Hong Kong, as discussed above.
FW: Is the rise of arbitration in Asia affecting the way commercial contracts are drafted, such as the nature of certain clauses relating to potential disputes?
Starr: Most definitely. There is an increasing trend in commercial lawyers seeking advice from dispute resolution lawyers about arbitration clauses. There is more awareness and recognition that the dispute resolution clause should form an integral part of the commercial negotiations and that is something of value. Previously, the focus was on the deal, and the dispute resolution clause was something that was ‘tacked on’ if someone actually thought about it, which sometimes gave rise to the validity of the clause, especially when it was poorly drafted.
Gearing: Arbitration clauses require careful drafting, and it is often advisable to include jurisdiction specific provisions in the region and take local advice if you’re considering a seat outside Singapore or Hong Kong. For example, when contracting with Indian counterparties it is advisable to exclude Part I of the Indian Arbitration and Conciliation Act, and when selecting a seat in China parties are required to use a local institution to administer the arbitration such as CIETAC.
Kwan: Drafters should specify a single arbitration commission with matching arbitration rules. We have seen many clauses that specify more than one Chinese arbitration commission, provide for the option to appoint arbitrators outside the CIETAC panel, and provide for a national of a country which is not of the parties to be the presiding arbitrator. Drafters should not specify the ICC or other foreign arbitral institutions to administer the arbitration or include a jurisdiction clause, undermining the arbitration agreement. They also should not specify an arbitration venue and institution outside the PRC for domestic disputes which do not contain a foreign element, or specify a split clause, which provides for one party to have the option to arbitrate while the other party can only litigate.
Matthew Gearing is a partner at Allen & Overy LLP. He specialises in international arbitration and possesses substantial experience of conducting international disputes in the courts. Mr Gearing has been based in Allen & Overy's London and Hong Kong offices and has acted in a large number of arbitrations around the world. His experience includes arbitrations under the ICC, ICSID, UNCITRAL and LCIA Rules in Europe, Pakistan, the former Soviet Union, Trinidad, the Philippines, the People's Republic of China, Hong Kong, and Vietnam, among others. He is a co-editor of a leading textbook on arbitration, and has lectured widely on the subject. He can be contacted on +852 2974 7177 or by email: email@example.com.
Paul Starr is a partner and head in Asia for dispute resolution and construction practices at Mallesons Stephen Jaques. He has been based in the Far East since 1985, and has conducted and helped to resolve many of Asia’s largest infrastructure disputes. In recognition of Mr Starr arbitration expertise in China over the past 20 years, he has achieved the great honour of being elected onto the arbitration panel of CIETAC. He is also an accredited arbitrator and mediator with HKIAC, and a mediator in Singapore with SME. Mr Starr can be contacted on +852 3443 1118 or by email: firstname.lastname@example.org.
James Kwan is partner in the Hong Kong office of Simmons & Simmons. He is widely recognised for his infrastructure, power, civil engineering and energy expertise internationally, and was nominated as a leading arbitration and construction lawyer in Who’s Who Legal UAE 2008 and Chambers Global 2007. He was also recognised for dispute resolution in Legal 500. Mr Kwan sits as an arbitrator and is on the DIAC and (CIETAC) panel of arbitrators He is also a guest lecturer for the DIAC and King’s College University of London arbitration courses and for the Chartered Institute of Arbitrators. He can be contacted on +852 2583 8380 or by email: email@example.com.
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