Traditionally, Chinese companies could avoid engaging in international arbitration because it was difficult to enforce international awards in China. However, the enforcement of international awards in China has greatly improved in recent years. This is in part due to the reporting system implemented by the Supreme People’s Court of China, which mandates that no international awards can be refused enforcement unless approved by the Supreme People’s Court. Accordingly, as Chinese companies are increasingly going abroad and engaging in business with foreign companies, they need to be better prepared when disputes arise.
There is a perception that Chinese companies are often unsuccessful in international arbitration. While this is generally not the case, Chinese companies can face hurdles in international arbitration due to differences in cultural, commercial, and legal customs. In this article, we address some possible reasons for this, such as not engaging legal counsel at an early stage, not having appropriate evidence at hand, and a lack of familiarity with international arbitration procedures. In doing so, we will outline some of the ways that Chinese companies can better position themselves for success in international arbitration.
Failure to involve legal counsel until service of notice of arbitration
When a company is served with a request for arbitration, often the first response will be to find the most experienced law firm in an attempt to ensure a successful outcome in the arbitration. However, by the time that a dispute has reached the point of service of a request for arbitration, many of the factors that will determine the ultimate outcome of the arbitration will already have been determined. Accordingly, better positioning Chinese companies for success in international arbitration often requires addressing what occurs before a dispute arises.
One of the initial issues that can give rise to difficulties in arbitration proceedings is the extent to which legal counsel are involved in negotiating and drafting of contracts. The general approach of Western companies is to employ a large team of black-suited lawyers early in a transaction to negotiate and draft their contracts. In contrast, many Chinese companies enter into contracts with little or no input from legal advisers (either their internal legal department or from external law firms). It is not uncommon for Chinese companies to send relatively junior employees to negotiate contracts worth hundreds of (USD) millions without engaging legal counsel.
When Chinese companies do engage external legal advisers, it is not uncommon for the companies to have already concluded a deal and they then request their external counsel to document the agreement within a couple of days.
This ultimately leads to a contract that has been drafted heavily in favour of the other side (which has engaged legal counsel) or one that is simply poorly drafted. On some occasions, the agreement is recorded in English and does not accurately reflect the Chinese party’s intention of what was agreed.This is likely to lead to disputes in which the Chinese party finds itself disadvantaged from the very beginning.
The lack of involvement of legal counsel often continues through the time of termination of a contract. Decisions to terminate a contract should not be taken lightly and generally should only be made after receiving legal advice. It is important to obtain advice to set up the termination and ensure that there is a strong legal basis supported by adequate evidence. Often Chinese companies only seek advice once they have terminated the contracted, which can be too late. Even when seeking advice before termination, the Chinese party might get the wrong advice, as sometimes they will consult a PRC lawyer to advise on a contract which is governed by non-PRC law. Accordingly, by the time arbitration arises, a party may have already made adverse admissions or failed to adequately state or preserve their legal position.
It goes without saying that documentary evidence is critical in international arbitration. Generally, a substantial period of time will have passed between the occurrence of the facts in dispute and the oral hearing. As a result, contemporaneous business records are often highly persuasive.
Unfortunately, Chinese companies often have difficulty locating documentary evidence to support their allegations at an international arbitration. There are many reasons for this difficulty, some are due to practical factors, while others are due to cultural factors.
In relation to some of the practical challenges, many employees of large Chinese companies do not use their company’s email account. Instead, they may prefer to use personal email accounts even when corresponding on matters that fall within the scope of their employment. If such an employee is no longer employed by the company, all the emails that the employee has sent during the course of their employment are no longer accessible and discoverable. More recently there is a tendency for employees of Chinese companies to conduct business through messaging apps (such as WeChat and Whatsapp). Again, if the employee is no longer employed by the company or loses their phone, there is a risk that the messages will be lost. In addition, many Chinese companies do not have a centralised document management system. As a result, it can be very hard to locate contracts and other documentary records.
The inability to produce relevant correspondence and documentation can have a serious impact on the conduct of international arbitration. The obvious issue is the inability of Chinese parties to prove facts in dispute. For example, the inability of a Chinese company to produce financial and accounting records may result in the failure to establish the quantum of a claim. However, it can also lead to the drawing of adverse inferences against a party who claims not to possess key documents relevant to a dispute.
There are also cultural reasons why Chinese companies might lack documentary evidence to support their claims. In our experience, Chinese parties often rely on oral communication during contract negotiations and performance. They are also often comfortable entering into oral agreements and using oral agreements to amend a written contract.
Relying on oral communication and oral agreements in international arbitrations can be problematic. The obvious difficulty is there is no objective evidence of the communication or the terms of the agreement. Thus the oral communication or agreement will be subject to the parties’ recollections. Proving these matters will ultimately depend on the reliability of a party’s witnesses, which may depend on the complexity of the oral discussion or agreement, the amount of time that has passed since the discussion or agreement, and the persuasiveness of contrary witness testimony.
Frequently, the terms of an oral discussion or agreement are recorded in an email, sent shortly after the meeting and setting out what was discussed between the parties. However, in China, there is a heavy reliance on personal relationships. As a result, requesting a written record of an oral discussion or agreement may be seen as a lack of trust. For example, if two parties orally agree to amend a contract, it could be seen as a lack of respect for one party to ask the other party formally to amend the contract in writing in accord with their oral agreement. If there is a lack of documentation of the agreement to amend the contract, there is a greater chance of a dispute arising. When a dispute arises, Chinese companies may find it difficult to prove the communication took place or the terms and effectiveness of an oral agreement.
Procedures of international arbitration
Chinese companies may also be unfamiliar with the process and procedures of international arbitration. Most international arbitrations adopt common law procedures such as witness statements, discovery, and cross-examination of witnesses. As China has a civil law system, Chinese companies may be unfamiliar with these procedures.
For example, in domestic litigation in China, there is no obligation on parties to provide discovery. As a result, many Chinese companies are unfamiliar with the concept of providing discovery in international arbitration and, in the absence of advice from counsel experienced in international arbitration, may not appreciate the efforts expected. From our experience, some Chinese parties are reluctant to provide produce documents that may hurt their case. Others do not understand the importance of locating and producing relevant documents. For example, they may not have complied with their duty of best efforts to obtain documents that are in the possession of entities or persons with whom or with which the party the subject of the request has a relevant relationship. Failing to comply with discovery obligations can have important consequences. In particular, if the IBA Rules on Taking of Evidence are applicable, a tribunal may infer that a particular document would be adverse to the interests of the party that failed to produce the particular document that was requested by the opposing party.
Another example is that international arbitrations generally involve cross-examination of witnesses. In contrast, crossexamination is not part of the Chinese legal system. As a result, Chinese lawyers and witnesses often will be unfamiliar with this adversarial process and will find it difficult and uncomfortable. However, lawyers who are trained in common law jurisdictions will be more experienced and comfortable cross-examining witnesses and preparing Chinese witnesses for this process. As many cases are ultimately decided on the testimony given under cross-examination, it is important for Chinese companies to be represented by counsel that are experienced in cross-examination.
How can Chinese companies position themselves better?
Fortunately, it is not difficult for Chinese companies to overcome some of these hurdles. If Chinese companies frequently enter into contracts with foreign parties, we recommend involving legal counsel at an early stage.
Secondly, when dealing with foreign companies, it is preferable to avoid oral agreements or oral amendments to written contracts. It is best to reduce oral agreements to writing. If this is not possible, then simply sending an email noting the contents of the oral agreement can prove invaluable in international arbitration. The same applies to important oral communication.
Thirdly, we recommend ensuring that employees use the company’s email account. They should avoid using apps such as Whatsapp and WeChat when corresponding on important matters (particularly, contractual negotiations). In addition, setting up a centralised document management system to create and store documents is important. It is even more important to create a culture in which employees use these systems and comply with a company’s internal policies on document management.
Lastly, if Chinese companies are involved in international arbitration, we recommend engaging a law firm that is comfortable with common law procedures such as discovery, preparation of evidence, and cross-examination of witnesses.