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September 3, 2007
NPC Standing Committee Enacts
Antimonopoly Law
By O'Melveny & Myers LLP
On August 30, 2007, the Standing Committee of the National People's Congress
(NPC) adopted China's first comprehensive competition statute, the Antimonopoly
Law . The final draft reflects over a decade of debate and redrafting, tussling
over regulatory turf by rival ministries and commissions, and unprecedented
dialog with foreign antitrust enforcement officials, scholars, and
practitioners.
The Antimonopoly Law targets three types of monopolistic conduct
anti-competitive "monopoly agreements" between multiple firms (such as
price-fixing and market-allocation agreements); "abusive" commercial practices
by dominant firms; and potentially anti-competitive concentrations, such as
certain mergers and acquisitions. (Article 3). Most provisions derive from
foreign antitrust laws, chiefly German and European Commission (EC) practices.
The final text may be construed to conform with prevailing international
antitrust principles and practices. However, it remains to be seen whether
foreign concepts embedded in the law will be applied with imported analytical
techniques, interpretations, and policy judgments.
Though the Antimonopoly Law 's promulgation is a substantial milestone in the
evolution of Chinese competition policy, the final text leaves unanswered many
fundamental questions about China's substantive antitrust policies and the
structures and procedures for enforcing the new law. The NPC delegated many
controversial decisions to the State Council, most notably the designation of
the primary "Antimonopoly Enforcement Authority," the composition of the
"Antimonopoly Commission" to coordinate competition policy, and the definition
of the thresholds for determining whether a transaction must be notified to the
Chinese authorities for antitrust review.
Similarly, the final text declares that the substantive antitrust rules do not
apply to legitimate exercises of intellectual property rights but do apply to
"abuses" of intellectual property rights; it does not reach the underlying
question of distinguishing anticompetitive abuses from valid, pro-competitive
exercises of intellectual property rights.
Most details of the final text are unsurprising in light of past drafts.
However, the final text does feature new articles targeting the involvement of
trade associations in organizing price cartels. In response to widespread
criticism, the final text confirms that presumptions of market dominance based
solely on the market shares of the allegedly dominant firm may be refuted with
evidence disproving the possession market power. In addition, the final text
explicitly warns that transactions with "national security" implications will
face separate reviews on national security grounds pursuant to other laws and
regulations (not the Antimonopoly Law ) in addition to the merger review on
competition policy grounds.
Another controversial aspect of the new law is the prohibition of
"administrative monopoly"– essentially, the anticompetitive misuse of official
power to protect or promote favored firms. The final text contains detailed
rules addressed to government instrumentalities prohibiting many discriminatory
and anticompetitive tactics of "administrative monopoly." Problematically,
government agencies are responsible for policing their own subordinate
departments and agencies for violating the rules against administrative
monopoly. Aside from acting as an advocate and watchdog, the antimonopoly
authority will lack power to compel compliance by other government agencies.
The Antimonopoly Law outlines the investigatory powers of the enforcement
agencies and the basic elements of the new merger control system, which is
expected to replace the current merger review process under the Regulations on
the Mergers & Acquisitions of Domestic Enterprises by Foreign Investors and
apply to Chinese and foreign parties alike (unlike the current merger review
rules).
Penalties for entering monopoly agreements and abuses of dominance include
confiscation of illegal gains, fines of 1 percent to 10 percent of the
offenders' total turnover from the preceding year, and orders to cease the
offending conduct. Unlike China's existing merger control rules, the
Antimonopoly Law authorizes substantial penalties for failure to report mergers
or consummating disapproved transactions; the enforcement authorities may order
corrective measures to restore pre-transaction conditions and impose fines up to
RMB 500,000. The mandatory minimum fines are worrisome, particularly since some
officials have suggested that the fines should be calculated based on annual
worldwide turnover.
In the eleven months remaining before the Antimonopoly Law takes effect on
August 1, 2008, the State Council and relevant ministries and commissions are
expected to address some of the outstanding issues through new decisions,
implementing regulations, and guidelines. Nevertheless, significant questions
will likely persist beyond August 1, 2008. In the end, the substance of Chinese
antitrust will depend on the institutional capacity, motives, and political
clout of China's new antitrust authorities.
March 8, 2007
Unofficial translation courtesy of Squire,
Sanders & Dempsey LLP
Antitrust Investigation Office of Ministry of Commerce of the
People’s Republic of China
Shang Fa Jingzheng Letter No.11 of [2007]
Notice of Meeting
To Whom it May Concern:
With a view to improving the work for antitrust review on merger and acquisition
of enterprises and improving the efficiency for such review, the Antitrust
Investigation Office of the Ministry of Commerce proposes to convene a seminar
at the Ministry of Commerce on March 28, 2007 to discuss the relevant issues
concerning amendment to the Guidelines for Antitrust Review Filing for Merger
and Acquisition of Domestic Enterprises by Foreign Investors.
Please assign one person to take part in the meeting and provide the name of the
personnel attending the meeting to the Antitrust Investigation Office of the
Ministry of Commerce before close of business on March 27. The language of the
meeting shall be in Chinese, please accompany a translator if necessary.
Time of the Meeting: AM 9:00-PM 17:00 March 28, 2007
Place of the Meeting: Room 1419 of the Ministry of Commerce, No.2 East
Chang’an Street
Contact Persons: Lin XIE; Tao JIANG
Contact Tel.: 65198680/8728
Fax: 65198905
Attachment: Enrolment Form of the Seminar
Antitrust Investigation Office of the Ministry of Commerce (with the seal of the
Department of Treaty
and Law of Ministry of Commerce)
March 26, 2007 - Unofficial translation courtesy of Squire, Sanders & Dempsey
LLP
Enrolment Form of the Seminar
Entity Contact Person Tel (Telephone/Mobile Phone)
Fax Email
Address
Unofficial translation courtesy of Squire, Sanders & Dempsey LLP
Guidelines for Antitrust Filing for Merger and Acquisition of Domestic
Enterprises by Foreign Investors
(Draft for Comments)
According to the Regulation on Merger and Acquisition of Domestic Enterprises by
Foreign Investors (Promulgated by Order No.10 [2006] of the Ministry of
Commerce), which was jointly promulgated on August 8, 2006 by the Ministry of
Commerce, State-owned Assets Supervision and Administration Commission of the
State Council, State Administration of Taxation, State Administration for
Industry and Commerce, China Securities Regulatory Commission, and State
Administration of Foreign Exchange, any merger and acquisition of enterprises
meeting the prescribed standard shall be reported to the Department of Treaty
and Laws of the Ministry of Commerce (Antitrust Investigation Office) in
advance. In order to facilitate the filings by the parties, we hereby release
the guidelines as follows:
I. Filing Party
The filing party shall be the merging/acquiring party in principle, and may
also be the merged/acquired party as the case may be. The filing party may
report in its own name or have a Chinese law firm acting on its behalf, in which
case, it shall be reported by a lawyer who is qualified to practice in China.
II. Time for Filing
The time for antitrust filing for merger and acquisition (“M&A”) shall be
made after the M&A agreement related thereto is signed and before the M&A
transaction is completed. If the acquisition is made through a tender offer in
the stock market, the antitrust filing shall be made after the release of the
offer.
III. Filing Materials
A filing party shall submit written materials in duplicate, together with an
electronic version thereof (we suggest it be a CD). All the filing materials
shall be made in Chinese, except for any attachment to such materials or as
otherwise required in these Guidelines. If the originals of such materials are
made in foreign languages, their Chinese translation shall be attached.
Materials submitted shall include the following:
(i) Report letter. The contents of the report letter shall be in brevity with
one or two pages of A4 paper. The report letter shall be signed by the filing
party or its attorney-in-fact.
(ii) Power of attorney and attorney letter. If the filing is made by an
entrusted agent, a power of attorney signed by the filing party and the letter
of the intermediary institution where the attorney-in-fact works (an attorney
letter in general) shall be provided. The power of attorney and the attorney
letter shall be originals.
(iii) Identity certificate or registration certificate of the filing party. A
filing party outside China shall also have the certificates notarized or
certified by local notary public office.
(iv) Basic information of each party to the M&A, which shall include but not
limited to: name, registration place and business scope of the enterprise,
corporate form (company, partnership or any other forms); name, title and ways
of contact of the contact person; sales volume of each party to the M&A in
recent one fiscal year (including global sales volume and sales volume within
China), company scale, position of the company in the industry, historical
information on the establishment and any change of the company, and etc..
(v) Name list of the enterprises affiliated with each party to the M&A and brief
introduction of each of them. The scope of the name list of enterprises shall
include but not limited to the following:
1. All the enterprises or individuals that directly or indirectly control each
party to the M&A;
2. All the enterprises that are directly or indirectly controlled by each party
to the M&A;
3. All the other enterprises other than the merging/acquiring party that are
directly or indirectly controlled by the enterprises or individuals as defined
in item 1 above. An organization chart or chart may be used to illustrate the
equity structure, actual control and other affiliated relationships among the
aforesaid enterprises.
(vi) Name of the foreign-invested enterprises established by each party to the
M&A within China.
(vii) General information regarding the M&A transaction, including: nature and
ways of the transaction (e.g., assets acquisition, stock acquisition, merger,
and establishment of joint venture enterprises), subject matter and amount of
transaction, M&A transaction process, estimated date for Unofficial translation
courtesy of Squire, Sanders & Dempsey LLP completion of the M&A transaction, the
control relationship among relevant companies after completion of the M&A
transaction (the company control structure may be showed with a chart, if
necessary), and the industry or main products involved in the M&A transaction,
as well as the motivation, the purpose and the economic rationality of the M&A
transaction.
(viii) Defining of Scope of Relevant Market. The defining of the scope of the
relevant market shall include in general the defining of the product market and
the regional market. Explanations shall be made on the reasons for defining or
not defining the relevant market. In defining the relevant product market, such
factors as the replace-ability, competition conditions, price, price flexibility
upon the change of demand and supply, and etc. shall be taken into
consideration. In defining the relevant regional market, such factors as the
nature and characteristics of the relevant product, access barriers, consumer’s
preferences, exceptional differences in market shares or actual prices of the
enterprise in different regional markets, and etc. shall be taken into
consideration.
(ix) Sales volumes and market shares of each party to the M&A in the relevant
market within recent two fiscal years, and the data sources and calculation
basis shall also be explained.
(x) Names and market shares of the top five competitors in the relevant market,
whose contact persons and ways of contact shall also be provided.
(xi) Supply structure and demand structure of the relevant market, including the
name list of the major upstream and downstream enterprises and their ways of
contact.
(12) Information on Competition in the Relevant Market. The information on
market competition shall include without limitation the following:
1. Market access analysis.
(1) The total cost for entering the market by means of a scale identical with
that of existing major competitors, e.g. costs for establishing a distribution
system, promotion, advertising and services.
(2) Any statutory or de facto barriers to market access, e.g. governmental
permission or compulsory governmental standards in any form. Unofficial
translation courtesy of Squire, Sanders & Dempsey LLP
(3) Restrictions arising from patent, proprietary technologies and other
intellectual property rights and restrictions arising from the process of
licensing such rights.
(4) The extent to which the parties to the M&A are the licensors or licensees of
any patent, proprietary technologies or other intellectual property rights.
(5) The importance of scale economy for relevant product manufacturing; (6)
Information on sourcing channels, e.g. sources for raw materials.
2. Existence or non-existence of any horizontal or vertical cooperation
agreements between operators in the relevant market, e.g. Research and
Development Agreement, Agreement on Assignment of Patent Use Right,
Collaborative Manufacturing Agreement, Specialization Agreement, Distributorship
Agreement, Long-term Supply Agreement and Information Exchange Agreement.
3. Information on import product substitution in the relevant market.
4. Major market entry or exit events over the recent three years, including the
names and contact method of the enterprises that have entered or exited the
market.
(13) M&A Agreement. If any agreement is written in a foreign language, a Chinese
translation or a substantial Chinese abstract thereof shall be submitted
concurrently.
(14) Audited financial statements for the previous financial year of the parties
to the M&A. If any financial statement is written in a foreign language, a
Chinese translation or a substantial Chinese abstract thereof shall be submitted
concurrently.
(15) Information on the review of any filing with respect to the proposed M&A in
other countries or economic communities.
(16) Other information required to be furnished to the competent authority.
(17) A statement on the authenticity of the filed information and/or the
accuracy of information sources signed by all parties to the M&A or their
authorized representative.
IV. Time Limit for the Review
The time limit for the M&A review shall be thirty (30) business days,
commencing on the date of receipt of a complete set of filed documents. If the
parties to the filing have not received any notice of further review upon the
expiration of the 30-business-day period, the review of the filing may be deemed
as passed. If the parties to the filing have received such a notice, the parties
to the filing shall furnish further information or make further elaboration to
the competent authority as required in the notice, with the limitations period
for review to be extended in view of specific circumstances.
V. Pre-filing Consultations
In order to improve efficiency, and ensure the transparency and
predictability of review, the Antitrust Investigation Office encourages the
filing party and its entrusted agent to contact the Office, on an informal basis
prior to the official filing, for consultations on such matters as whether any
filing is necessary or how the relevant market shall be defined. Whether or not
any consultations have been made prior to filing shall not affect the conclusion
of the antitrust investigation.
(1) Time Limit and Method for Submitting Pre-filing Consultation Request The
consultation applicant shall submit a request for pre-filing consultations to
the Antitrust Investigation Office one month of official filing. Within one week
before official filing, the Antitrust Investigation Office will cease to accept
any request for prior-filing consultations. The pre-filing consultation request
shall be
made in writing and faxed to the Antitrust Investigation Office. (Fax No:
65198905)
(2) The consultation applicant shall furnish relevant documents to the Antitrust
Investigation Office, including introduction to transaction background, overview
of the relevant industry and the relevant market and the potential effect of the
proposed transaction on market competition. If the consultation
applicant does not contest the necessity for filing, it may directly provide a
draft of the M&A Report as the basis for consultations and discussions. Any
objections to the necessity for filing shall be presented in the stage of
consultations. The Antitrust Investigation Office suggests that the consultation
applicant adequately disclose all relevant information likely to impact market
competition and use its best efforts to furnish relevant documents.
VI. Confidentiality
If the filing party does not intend the filed information to be published or
disclosed, it shall present its request for confidentiality when submitting the
documents and shall briefly state the reasons for not disclosing or publishing
each document to be kept confidential.
VII. Time and Place for Document Submission
The filing party shall submit the documents to be filed to the Antitrust
Investigation Office of the Ministry of Commerce during the office hours of the
Ministry of Commerce. For convenience of prompt registration and acceptance,
please make the submission at any time between 8:30-11:0 am or 1:30-4:00 pm.
Address of the Antitrust Investigation Office of the Ministry of Commerce:
Room 3516, Ministry of Commerce, No. 2, East Chang’an Street, Beijing
Antitrust Investigation Office,
Department of Treaty and Law,
Ministry of Commerce
August 10, 2006
PRC Government Amends
M&A Code - O'Melveny & Myers LLP
On August 8, 2006, the PRC Ministry of Commerce (“MOFCOM”), the State Assets
Supervision and Administration Commission (“SASAC”), the State Tax
Administration (“SAT”), the State Administration for Industry and Commerce (“SAIC”),
the China Securities Regulatory Commission (“CSRC”) and the State Administration
of Foreign Exchange (“SAFE”) adopted the Regulations on Acquisition of Domestic
Enterprises by Foreign Investors (the “M&A Code”). Compared with the Temporary
Regulations on Acquisition of Domestic Enterprises by Foreign Investors issued
by MOFCOM, SAT, SAIC and SAFE (the “Temporary Code”), the M&A Code contains the
following important changes:
FIE Status - If an offshore entity established or controlled by a PRC company or
resident (the “PRC Controlled Offshore Entity”) acquires an affiliated PRC
domestic company (the “Affiliated Domestic Company”), the resulting foreign
invested enterprise (an “FIE”) will not enjoy the benefits available to other
FIEs, unless such acquisition takes the form of additional equity investment in
the Affiliated Domestic Company in an amount equal to or greater than 25% of its
registered capital or unless the investment in the PRC Controlled Offshore
Entity by foreign investors other than such PRC company or resident equals 25%
or more of the registered capital of the FIE.
MOFCOM Approval - Acquisition by a PRC Controlled Offshore Entity of an
Affiliated Domestic Entity is subject to approval by MOFCOM. No person may
circumvent such requirement by making domestic investment through an established
FIE or other means.
Nature of Target Company - A report is required to be filed with MOFCOM if a
proposed acquisition by foreign investors relates to a “key sector”, affects or
may affect the “national economic security” or results in a change of control of
domestic companies that have “famous trademarks or traditional Chinese brands”.
Affiliates - The parties involved in an acquisition need to explain if any of
them are affiliated. If two parties are actually controlled by one person, the
identity of such person needs to be disclosed to the approval authorities. An
explanation should be made as to the purpose of the acquisition and as to
whether valuation of the acquisition price is consistent with fair market value.
No person should circumvent these requirements through trust or nominee
arrangements or other means.
Share Swaps - The foreign investors may use their shares in an offshore company,
and an offshore company may issue news shares, as consideration for purchasing a
PRC entity. Unless permitted under the SPV Provisions (summarized below), the
shares used for such consideration should be shares of a listed company.
SPV Provisions - An SPV is defined as an offshore company which is directly or
indirectly controlled by a PRC domestic company or resident for the purpose of
listing on an overseas stock market its interest in a PRC domestic company
actually owned by such PRC domestic company or resident.
Shareholders of an SPV are permitted to use their shares in the SPV, and the SPV
can issue additional shares, as consideration for acquisition of PRC domestic
entities (the “Share Swap”).
The Share Swap is subject to approval by MOFCOM.
If the SPV fails to complete an IPO within one year after approval, the parties
must unwind the Share Swap and return the shareholding of the relevant domestic
entity to its original status.
The listing of an SPV on an overseas stock market is subject to approval by the
State Council department in charge of securities regulation (meaning CSRC).
Anti-trust Review - The relevant language in the M&A Code essentially has
remained the same as that in the Temporary Code, except that effects on
"national policy and people's livelihood and economic security" have been
eliminated from the list of factors to be considered in evaluating domestic
transactions.
Individual Shareholder - If the foreign investors acquire an interest in a PRC
domestic company and as a result convert it into an FIE joint venture, the PRC
nationals who were shareholders of the domestic company prior to the acquisition
can remain shareholders of the FIE joint venture after the acquisition.
* * * * * * *
The M&A Code will take effect on September 8, 2006. As the basic regulation
governing foreign related mergers & acquisitions in China, it will have
significant impact on future activities in this area, especially as it relates
to mergers & acquisitions by the PRC Controlled Offshore Entities of the
Affiliated Domestic Companies and the listing of the SPVs.
April 14, 2006
Hong Kong And Mainland
China To Implement New Arrangement On Reciprocal Enforcement Of Judgments In
Commercial Matters
- By O'Melveny & Myers LLP
A new arrangement between the Hong Kong Special Administrative Region and
Mainland China for the reciprocal enforcement of judgments in commercial matters
(the “Proposed Arrangement”) is expected to be implemented later this year. The
Proposed Arrangement has important implications for businesses operating in the
Greater China region. Importantly, parties to commercial agreements will need to
pay close attention to the framing of their jurisdiction or “choice of court”
clause, as this will determine whether any court judgments arising from disputes
between the parties can benefit from/be subject to reciprocal enforcement.
Although details are yet to be finalized, it is understood that the key elements
of the Proposed Arrangement will be as follows:
Application to money judgments arising from commercial contracts only
The scheme will only apply to money judgments arising from commercial contracts.
In this regard:
(1) judgments other than money judgments, such as orders for specific
performance or injunction, will not be covered;
(2) the definition of “commercial contracts” remains to be clarified, but it is
understood that contracts such as those relating to matrimonial matters, wills
and successions, bankruptcy and winding up, employment and consumer matters will
not fall within the meaning of “commercial contracts”.
Finality requirement
Further, the Proposed Arrangement will only apply to judgments which are “final
and conclusive”. In gist, an application for reciprocal enforcement may only be
made if the parties have agreed not to appeal the judgment or the time for
filing an appeal has passed.
In respect of the enforcement of Mainland judgments in Hong Kong, it is proposed
that a certificate of “final judgment” must also be submitted to the Hong Kong
court by the party seeking enforcement. This is to avoid any doubt as to the
finality of the Mainland judgment.
Exclusive jurisdiction requirement
Reciprocal enforcement will only be permitted where the parties to the
commercial contract have agreed to an exclusive jurisdiction clause in which
either the Mainland courts or the courts of Hong Kong have sole jurisdiction to
deal with any dispute under the contract.
The Proposed Arrangement does not apply in circumstances where the parties have
not made a prior express agreement on choice of court.
The requirement for adopting an exclusive choice of court clause by the parties
aims to minimize the risk of parallel proceedings being instituted in the courts
of both places, which may give rise to complications as to whether one of the
judgments is final.
Application to judgments of designated courts only
The Proposed Arrangement is expected to cover only the money judgments of
certain designated courts:
(1) in respect of Hong Kong judgments, the District Court or higher;
(2) in respect of Mainland judgments, the Intermediate People's Court or higher,
as well as certain designated Basic Level People's Courts.
No retrospective application
It is understood that the Proposed Arrangement will not have retrospective
application on those choice of court agreements entered into before the Proposed
Arrangement comes into force.
Safeguards
The Proposed Arrangement will provide a number of safeguards against the
enforcement of judgments that are considered to be “unsafe”. It is understood
that enforcement may be refused if any of the following circumstances arise:
(1) the choice of court clause is invalid in accordance with the law of the
place of enforcement;
(2) the judgment has been fully executed;
(3) the court of the place of enforcement has exclusive jurisdiction over the
dispute or has made a prior judgment on the same cause of action;
(4) the losing party had not been given sufficient time to defend its case;
the judgment was obtained by fraud;
(5) enforcement of the judgment is contrary to the social and public interests
of the Mainland (where enforcement is sought in the Mainland) or to the public
policy of Hong Kong (where enforcement is sought in Hong Kong).
Implications for businesses
The Proposed Arrangement follows a similar arrangement between the Macau SAR and
the Mainland, which came into force recently (see China Law & Policy, April 7).
These arrangements will no doubt have significant implications for businesses
operating in the Greater China region.
When entering into new commercial contracts, businesses will need to consider
carefully the benefits and potential pitfalls arising from the Proposed
Arrangement, and decide whether they wish to (and can) benefit from, and
similarly be subject to, the reciprocal enforcement scheme. If so, appropriate
drafting of the choice of court clause is required to ensure the agreement falls
within the scope of applicability of the Proposed Arrangement.
Way forward
The Proposed Arrangement is expected to come into force later this year, once
the requisite legislative backing in both Hong Kong and the Mainland are
obtained.
A further update will be provided closer to implementation.
Legal Notice: This publication is for general information
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may be considered an advertisement for certain purposes. The information
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our website is expressly disclaimed.
February 27, 2005
Time to Fix China’s Arbitration - by Jerome A. Cohen
For a long time, I believed in the ability of the China International Economic
and Trade Arbitration Commission (CIETAC) to deliver fair verdicts for foreign
companies embroiled in business disputes with local partners and counterparties.
This faith in the body that still handles the bulk of the international
commercial arbitrations conducted in China was largely based on my positive
initial experiences. However, more recent encounters have shaken my confidence.
Now I fear that without a concerted effort at reform, the credibility of China’s
leading arbitration institution will slip away.
Back in the mid-1980s, when CIETAC did not yet allow foreigners to serve as
arbitrators, I became the first foreign lawyer to appear before it as a dailiren,
or advocate, for a foreign company. The Chinese law professor representing the
local party to the dispute immediately challenged my right to do so, on the
ground that I was not licensed to practice law in China. (As a foreigner, I
could not be.) The presiding arbitrator, however, promptly rebuffed the
challenge, admonishing my counterpart to read CIETAC’s Arbitration Rules, which
clearly permitted anyone—Chinese or foreign, lawyer or non-lawyer—to serve as an
advocate.
Perhaps such an encouraging start colored my view of that arbitration and
subsequent CIETAC proceedings. Before the first hearing, I had not known what to
expect. Of course, I hoped that CIETAC would prove to be a better alternative
than the courts. In those days, foreigners knew little about Chinese courts, but
generally believed, as did many Chinese, that the courts suffered from both lack
of professional competence and the distorting influences of guanxi, local
protectionism, corruption and politics. The arbitrators before me offered a
refreshing contrast, for they seemed to be competent, fair, honest and
independent.
Over the next decade, experience with CIETAC as both advocate and arbitrator
reinforced that favorable impression, which I often voiced in both publications
and lectures. Being an optimist, I thought that if an institution called an
“arbitration commission” could establish apparently admirable dispute-resolution
tribunals in China, perhaps an institution called a “court” could some day do
the same.
Occasionally, some foreign and Chinese lawyers politely hinted that my positive
appraisal of CIETAC was naive. But understandably, no one sought to refute me in
public when to do so would involve him in controversy and perhaps damage his
“rice bowl.” Frankly, however, I had neither the time nor the inclination to
look into the matter, since I had not yet personally encountered any
disillusioning experience with CIETAC and had several friends working there.
Moreover, foreign legal scholars have tended to focus on the troublesome
problems of enforcing an arbitration award in Chinese court rather than on the
institutional and procedural problems of obtaining a fair award in the first
place.
Unfortunately, in recent years my CIETAC experience, as both advocate and
arbitrator, has dimmed my earlier optimism. There is a pressing need to
undertake a comprehensive investigation of CIETAC’s practice—not merely its
rules—in order to enhance transparency and thereby speed the process of reform.
My hope is that CIETAC, which has made many improvements in response to Chinese
and foreign suggestions, will cooperate with both official and non-governmental
efforts to address the serious problems of institutional integrity that confront
it, and will not seek to suppress justifiable criticism. How CIETAC copes with
these issues will determine its future reputation and its prospects in a market
where it now must compete—not only with foreign arbitration organizations but
also domestic ones, the best of which have shown themselves to be commendably
sensitive to ethical and other institutional considerations.
Here are 10 recommendations that urgently require the consideration of CIETAC
and the international business and legal communities:
* CIETAC should not use its own personnel as arbitrators. One of CIETAC’s
biggest defects is its persistent selection of its own personnel as arbitrators,
especially presiding arbitrator. This creates an obvious opportunity for the
exercise of administrative influence and even control over the arbitration panel
and its decision.
This practice can also involve its staff in conflicts of interest even when no
CIETAC influence is exercised behind the scenes. The world’s best arbitration
organizations, including Stockholm’s (which has often mentored CIETAC staff ),
do not permit this practice. I am happy to note that the Beijing Arbitration
Commission (BAC), which now handles over twice as many cases, most of them
domestic, as CIETAC, also rejects this practice. Today there is no shortage of
able potential arbitrators in China, both Chinese and foreign, and CIETAC should
open its roster to a new generation of experts.
* A national of a third country should serve as presiding arbitrator. Many more
foreign companies would select CIETAC arbitration if they believed that not more
than one member of a three-person panel would be a Chinese national.
Today, some sophisticated international lawyers know that CIETAC will honor an
arbitration clause that calls for the presiding arbitrator to be from a third
country, but this encouraging new development is not widely known and CIETAC
seems reluctant to publicize statistics regarding its use. Furthermore, unless
the parties specify in their contract, the presiding arbitrator, whether
appointed by agreement of the parties or by CIETAC in the absence of such
agreement, is most probably going to be Chinese.
This is what worries many foreign companies, particularly those who know of
cases in which the presiding arbitrator and the arbitrator appointed by the
Chinese party, both Chinese nationals, have rendered decisions that could not be
justified by their foreign arbitrator colleague. CIETAC would enhance its
fairness and its attractiveness by amending its rules to require that the
presiding arbitrator in international and foreign-related cases always be from a
third country unless the parties agree otherwise.
Moreover, regardless of the presiding arbitrator’s nationality, CIETAC should do
more to enable the parties to agree on the presiding arbitrator, for example, by
requiring each party to submit lists of names of persons they could accept, as
the BAC now does. The idea should be to diminish the arbitration organization’s
role in this important selection, which would reduce the opportunity for
behind-the-scenes negotiations with CIETAC that reportedly take place over this
important decision.
* The presiding arbitrator should be a respected legal expert familiar with the
relevant business background. The presiding arbitrator, of course, is the main
figure in each arbitration. Not only is his vote often decisive on the merits,
but he is frequently called upon to take the lead in important rulings in the
course of the proceedings, especially during the hearing when rulings need to be
made quickly. Yet I have taken part in more than one CIETAC case in which the
presiding arbitrator—a CIETAC official with over a decade of administrative
experience—appeared to lack a clear understanding of contract law and procedural
matters, as well as the business environment of the dispute.
Of course, some CIETAC administrators have made excellent presiding arbitrators.
They should continue to serve as such, not for CIETAC, but for other arbitration
organizations, Chinese and foreign. Whether or not my two previous
recommendations are adopted, in order to maximize confidence in the quality and
fairness of the arbitration, it will continue to be crucial to appoint a
presiding arbitrator who is both an acknowledged legal expert and at home in the
business background of the dispute.
* CIETAC should limit the number of cases in which someone can serve as an
arbitrator at any one time. An arbitrator who serves on too many cases for the
same arbitration organization runs the risk of losing his independence to that
organization. This is especially true if the organization appoints the
arbitrator or introduces him to a party to the dispute. In those circumstances,
the arbitrator inevitably becomes too familiar with the commission staff and, in
order to sustain his income, too reliant on their favor.
This is wholly apart from the question of whether an arbitrator who takes on too
many cases has the time and energy to do a competent job. Out of concern for
this problem, the BAC now prohibits its arbitrators from handling more than 10
cases simultaneously. CIETAC should apply such a limit to foreigners as well as
domestic experts. Certainly, one can debate how many cases are “too many,” but
10 a year might be an appropriate limit.
* CIETAC should prevent its arbitrators from serving as advocates in other
CIETAC cases. I have served as both advocate and arbitrator before both CIETAC
and other international arbitration organizations. Such alternation of roles is
generally permitted in international practice. Yet I am struck by the BAC’s
recent amendment of its rules to require all those who serve as its arbitrators
to cease serving as advocates in other cases before it.
The new rule is based on the assumption (which reportedly reflects BAC’s
experience) that allowing Chinese lawyers to alternate roles within the same
arbitration organization breeds incestuous familiarity among advocates,
arbitrators and commission staff. This, in turn, fosters opportunities for
irregularities and diminishes institutional integrity.
This may be my most controversial suggestion, since it can drastically reduce
the income of arbitration specialists, foreign as well as domestic. Yet, as BAC
believes, even if foreign organizations find it unnecessary, given the nature of
Chinese society and the small arbitration community, such a reform is warranted
at present in order to prevent a “You scratch my back, I’ll scratch your back”
ethos from damaging the impartiality of arbitrators.
* Advocates as well as arbitrators must fully disclose conflicts of interest.
Not long ago I served as advocate for a foreign claimant in a Beijing CIETAC
case which resulted in a hearing that my client and I deemed grossly unfair. A
week later, we discovered that the advocate for the respondent, had, without
public announcement, become a vice chairman of CIETAC shortly before the
hearing.
That meant the presiding arbitrator, a deputy secretary general of CIETAC, was
the subordinate of the other side’s advocate. Nevertheless, at the outset of the
hearing, when the presiding arbitrator asked whether the parties wished to
disqualify any arbitrator, neither the presiding arbitrator nor the new vice
chairman thought it necessary to reveal this crucial fact.
The claimant brought this blatant impropriety to the attention of the commission
by means of a memorandum demonstrating that no other major international
arbitration organization in the world would countenance this practice. CIETAC
then reluctantly ordered replacement of the presiding arbitrator with a very
able Chinese lawyer who is not on its staff. A new hearing had to be held, which
put both parties, especially the foreign claimant, to great additional expense.
To avoid repetition of this sad incident, CIETAC should require advocates as
well as arbitrators to reveal in writing and in advance of the hearing all of
their professional and organizational responsibilities plus any other facts that
might bear upon the impartiality of the arbitrators. The guanxi net can be very
wide in the relatively small group from which advocates, arbitrators and
administrators are drawn.
If, for example, a law professor who serves as an advocate happens to be
supervising the doctoral thesis of an arbitrator or CIETAC administrator, that
surely should be revealed to the opposing party. Moreover, if CIETAC is at fault
because of the negligent or intentional failure of its personnel to make a
necessary disclosure, it should compensate the parties for the damage it has
caused them, and the personnel involved should be appropriately disciplined.
* CIETAC should enhance the confidentiality of its proceedings. Every
dispute-resolution institution must keep confidences. This is certainly true of
an international commercial-arbitration organization, which promises the parties
complete confidentiality unless the parties agree otherwise. An arbitration
organization that fails to honor that promise fails to inspire confidence.
Yet it is extremely difficult to live up to this ideal. Discretion is an
acquired discipline. Human beings like to gossip with friends, exchange
information with classmates and share their problems with family. They sometimes
reveal secret information for corrupt or political motives, and sometimes,
fortunately, “whistle-blowers” expose wrongdoing within the organization.
Whatever the reasons, I know from personal experience that CIETAC leaks, and at
various levels.
But what can be done about it? Obviously, the importance of preserving
confidentiality must be repeatedly brought home to leaders, arbitrators and
staff. Every opportunity must be seized to remind them of their obligation,
which has long been spelled out in legislation and in the commission’s rules and
ethical standards.
I believe it is necessary to provide more significant sanctions than currently
exist and to apply them against those who breach confidentiality without
justifiable excuse. I emphasize the words “without justifiable excuse,” since
CIETAC personnel should not be discouraged from continuing to reveal
institutional and individual irregularities that would otherwise never be made
public.
* More stringent standards should be applied to prevent arbitrators from
engaging in ex parte contacts regarding their cases. A related and even more
substantial challenge to CIETAC’s integrity is the illegal and unethical
practice of certain arbitrators privately discussing their case with
unauthorized persons, whether officials, lawyers or others.
Such contacts are usually hard to detect without the assistance of the state
security or public security agencies, but it is common knowledge that they take
place. A much-admired law professor told me that, rather than appear as an
expert witness in a CIETAC hearing, instead he informally discussed the issues
with the arbitrators. “That’s still the Chinese way,” he said with a
self-conscious giggle.
Chinese lawyers working on a case in another forum in which I was serving as an
arbitrator unsuccessfully tried to get me to discuss it with them. Moreover, it
is even believed, based on confidential assertions made by both CIETAC staff and
Chinese lawyers who have themselves served as CIETAC arbitrators, that CIETAC
has on occasion ordered its Chinese arbitrators to change the outcome of their
proposed award, i.e., not merely to alter the form of the award but the result!
Plainly, it is time for some higher authority to investigate the truthfulness of
such disturbing allegations. But CIETAC need not await the report of such an
investigation. It can immediately make clear to its arbitrators, leaders and
staff that such practices will no longer be tolerated, that existing laws, rules
and ethical standards will be strictly enforced and that punishments will be
increased and applied to CIETAC personnel and others. And surely, CIETAC should
immediately cease interfering with proposed awards.
* CIETAC staff should not draft awards for arbitrators. It is widely believed
that CIETAC staff draft awards for some Chinese arbitrators, thereby enabling
them to handle many more cases than they otherwise would. Although judges in
many countries enjoy the help of their law clerks, and arbitrators everywhere
may need confidential research and other assistance, I believe that arbitrators
should draft their own awards. Otherwise, it becomes all too easy for them to
make decisions without having to confront the intellectual difficulties that
stand in their way.
My mentor, American Supreme Court Justice Felix Frankfurter, used to say that
“some opinions simply won’t write,” meaning that one who actually has to spell
out the reasons for his decision sometimes has to change his mind. Before the
hearing, CIETAC does not require arbitrators to face up to the issues in
dispute, as the International Chamber of Commerce does in requiring the
arbitrators to agree with the parties and their advocates on highly detailed
“terms of reference.” Surely, after the hearing, CIETAC should not make it easy
for the arbitrators to avoid the issues by drafting the award for them. The BAC
requires arbitrators to do their own work.
* CIETAC should require a dissenting arbitrator to write an opinion and make it
available to the parties and their advocates. An even more important measure for
assuring that arbitrators render reasoned and fair decisions is to require every
dissenting arbitrator to draft an opinion supporting his views and to make it
available to the parties and their advocates together with the award of the
majority. Otherwise there is no effective restraint on the factual and legal
assertions of the majority.
Although judicial review is possible in a proceeding to enforce or set aside an
award, the scope of such review is inevitably limited, and no judge can know the
case as well as an arbitrator. Moreover, the dissenting opinion, in addition to
challenging the dissenter to justify his negative vote, may make possible more
adequate judicial review of an award that deserves serious scrutiny.
Yet CIETAC does not permit dissenting opinions to be made available to the
parties and their advocates, even if the dissenter wishes to write one. This, as
I can testify from personal experience, is frustrating not only for the losing
party but also for the minority arbitrator. Again, CIETAC would do well to
follow the example of the BAC. Since March 1, 2004, it has required dissenters
to attach an opinion to the award.
I have raised these recommendations in the good-faith belief that transparency
and the criticism that it makes possible foster law reform and fair dispute
resolution. I do not pretend to have all the facts or all the answers. Indeed,
there are many more questions to ask.
CIETAC representatives, who have shown themselves to be extremely sensitive to
criticism, will undoubtedly have much to say in response to these
recommendations, as will other Chinese and foreign experts. I hope that CIETAC’s
new rules, which are expected this spring, will take them into account.
In any event, I welcome a healthy discussion of the merits. It is time, in the
interest of China’s economic development, its efforts to create a rule of law
and its cooperation with the world, to bring these issues out of the shadows.
Mr. Cohen is a professor of law at New York University and an adjunct senior
fellow at the Council on Foreign Relations. This article is adapted from a
speech delivered on Nov. 4, 2004 to a conference in Xiamen sponsored by the
Chinese Society of International Economic Law and Xiamen University.
*3rd Party Opinion for strict
information only - you must consult with an attorney - our Chamber of Commerce
is not responsible for the accuracy of the information listed here.
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