A PRC lawyer friend recently brought to our attention a decision from the Supreme People’s Court in 2004, which illustrates the importance of appointing the right expert in a PRC arbitration.

In this case, the parties were in dispute over issues of cost engineering and construction quality. They submitted the case to arbitration before the Foshan Arbitration Commission (the “Arbitral Tribunal”).  Article 44 of the Arbitration Law and Article 56 of the Foshan Arbitration Regulations provided that, when an  issue arises which requires expert opinion, the parties may agree on the appointment of an expert jointly, or alternatively, leave it to the determination of the arbitral tribunal. The Arbitral Tribunal appointed De Zheng Certified Public Accountants LLP (“De Zheng CPA”) as the expert and made an award based on its valuation report. Dong Jun Real Estate subsequently challenged the enforcement of the award on the ground that there was procedural irregularity in that the Arbitral Tribunal had relied on the findings of De Zheng CPA as the expert, who lacked the requisite qualifications and which thereby rendered the award unenforceable.

The issue before the Court was whether there had been procedural irregularity in the arbitration proceedings, which constituted a breach of procedural rules concerning foreign arbitration under the PRC Arbitration Law, such that the award was unenforceable.

The Guangdong Intermediate People’s Court was of the view that the award should not be enforced. According to the “reporting-up” mechanism for the enforcement of foreign related awards, such view was submitted to the Guangdong Higher People’s Court for consideration, which rejected the application for enforcement. The Guangdong Higher People’s Court gave the following opinion:-

  1. When the parties entrusted the arbitral tribunal to appoint an expert, the arbitral tribunal had discretion over the choice of expert, in accordance with the relevant laws and regulations. However such discretion was confined to making the selection from a  list of suitably qualified personnel and  not randomly;  
  2. When appointing an expert, the arbitral tribunal had an obligation to ensure that the proposed expert possessed the relevant qualifications, as the issue which the expert is required to deal with is a specialised one, such that the expert’s qualifications must be recognised and approved by the relevant authorities;  
  3. If the arbitral tribunal had not carried out its obligation by inquiring into the proposed expert’s suitability, such as whether the expert’s scope of business and qualifications were relevant to the issues he was to give expert evidence on, then  the arbitral tribunal would be in breach of its duty;  
  4. According to the relevant regulations of the Construction Department of the Guangdong Government (the “Construction Department”), a person qualified to give an opinion concerning cost engineering and construction quality should have obtained the Certificate of Cost Engineering issued by the Construction Department. De Zheng CPA had never been issued with such certificate;  
  5. The Arbitral Tribunal appointed De Zheng CPA for the purpose of collecting evidence, which was part of the arbitration procedure. By appointing and relying on the findings of De Zheng CPA, who lacked the requisite qualification, the Arbitral Tribunal was in breach of the evidence collecting procedure and, consequently, in breach of the arbitration procedure.

The above opinion was further submitted to the Supreme People’s Court for approval, pursuant to the “reporting-up” mechanism mentioned above. The Supreme People’s Court concurred with the Guangdong Higher People’s Court that the arbitral award should not be enforced, for the following reasons:-

  1. The evidence had shown that De Zheng CPA did not possess the relevant qualifications, as required under the relevant laws and regulations;  
  2. Pursuant to Article 44 of the Arbitration Law and Article 56 of the Foshan Arbitration Rules, the arbitral tribunal may appoint an expert, but such expert, must be selected from the list of qualified personnel;   
  3. Although the relevant Arbitration Law and Foshan Arbitration Regulations did not expressly stipulate requirements for experts’ qualifications in appointing experts in arbitration, such must be implied so as to give legitimacy to the expert evidence; and  
  4. Where the expert lacks the requisite qualifications as required by the relevant authorities, the arbitral award can be regarded as not in conformity with the rules of arbitration, pursuant to Section 1(3) of Article 260 of the Law of Civil Procedure and thereby unenforceable under Section 1(3) of Article 260 of the Law of Civil Procedure and Article 71 of the Arbitration Law.

The Supreme People’s Court decision serves as a reminder for parties and arbitral tribunals to take care when appointing experts for arbitrations, especially for foreign parties who may not be aware that the scope of business of an enterprise is highly regulated in PRC. It is important to pay attention to the type of business to which the expert issues relate. If it is regulated by PRC law or is not within the scope of business set out in the enterprise’s business licence, the enterprise may not be qualified to act as expert in arbitrations.  It should be noted that the decision dealt with a tribunal appointed expert whose role, as we understand it, may not be regarded as the same as expert appointed by the parties under PRC law. Whether and how the same principle will apply to party-appointed experts remains to be seen.