Litigation Vs. Arbitration: Preparing for a Legal Fight

Parties seeking to enforce contracts in Asia often choose arbitration. The reason: it offers a neutral, flexible and enforceable dispute resolution procedure.
 
CFOs negotiating M&A deals and entering into contracts with outside parties will benefit from an understanding of arbitration in the Asian context. In particular, it is difficult to overestimate the importance of agreeing a suitable arbitration clause. By getting this right at the contractual stage, parties can ensure a fast and efficient dispute resolution process should things not go to plan during the life of the contract.
 
Below we further outline why arbitration is the dispute resolution mechanism of choice in Asia and highlight some pitfalls for those involved in disputes in the region.
 
Why Arbitration?
Arguably, arbitration’s main advantage is the easy enforceability of arbitral awards across borders. This is made possible by the widespread adoption of the New York Convention on the Recognition and Enforcement of Arbitral Awards (the “New York Convention”). Most jurisdictions, including China, have adopted the New York Convention.
 
By contrast, there is no comparable system of reciprocity for the enforcement of court judgements. Therefore, where a transaction has a strong international element such as a cross-border M&A agreement, it will often make sense to include an arbitration clause in the underlying contract.
 
In addition to reciprocity, arbitration is characterized by flexibility and neutrality. Arbitration allows parties to formulate a dispute-resolution procedure that matches their circumstances and expectations. And because the proceedings take place in a venue beyond the jurisdiction of the home courts of either party, there is a presumption of neutrality around the tribunal’s eventual decision.
 
In arbitration, the parties appoint the members of the arbitral tribunal. This gives the parties confidence in the competence, independence and impartiality of the tribunal, whose members they chose on the basis of their legal and technical expertise for the dispute that has arisen.
 
Unique China
While it is also a signatory to the New York Convention, China’s laws and dispute-resolution traditions set the PRC apart from most other countries when it comes to arbitration.
 
PRC and Western parties alike should be aware of these distinctions when specifying China as the seat of arbitration. The rules of China’s leading arbitration institutions certainly allow for a procedure in line with international best practices. 
 
Traditionally, however, dispute resolution proceedings in the PRC have been considered a little “rough and ready” by some. Hearings may be cursory, with little room for the testing of witness evidence, and the production of documents.
 
However, many of the differences between traditional Chinese arbitration and international best practice can be avoided by a well-drafted arbitration clause allowing for the appointment of a tribunal with suitable international experience. Ensuring a neutral chair of the tribunal is also an important drafting consideration.
 
Chinese law gives the local courts wide supervisory powers over domestic arbitration proceedings, including the right to decide questions as to the validity of the arbitration agreement and the extent of the tribunal’s jurisdiction. It also restricts the administration of China-seated arbitrations by foreign arbitral institutions and prohibits ad hoc arbitration (i.e. arbitration conducted without the assistance of an administering arbitration institution).
 
Parties should also be aware that Chinese domestic law prohibits the resolution of domestic disputes outside of China. China-incorporated subsidiaries of foreign companies are domestic entities for these purposes. They cannot therefore resolve their disputes against Chinese companies outside of the Chinese mainland. If they do, the resulting award will likely be unenforceable in China.
 
Hong Kong and Singapore
Parties looking to specify an Asian seat for their arbitration proceedings have a number of options.
 
In Hong Kong, the institution most commonly chosen to administer large commercial disputes is the Hong Kong International Arbitration Centre (HKIAC). Hong Kong is also home to a branch of the Paris-based ICC (International Chamber of Commerce), whose International Court of Arbitration was established in 1923.
 
The largest Chinese arbitration institution, the China International Economic Trade Arbitration Commission (CIETAC), updated its rules in 2012 to explicitly allow it to administer arbitrations seated outside of China. It has since opened an office in Hong Kong.
 
The popularity of Hong Kong as a seat of arbitration is partly due to the reputation of the Hong Kong courts as supportive of arbitration and reluctant to interfere in the autonomy of arbitration proceedings. Hong Kong is also home to a large community of experienced and internationally minded lawyers, including many who are culturally and linguistically familiar with mainland China.
 
The same can be said of Singapore, where the government continues to promote the city as a regional arbitration hub and the courts consistently follow a pro-arbitration, minimal intervention approach.
 
The best-known institution chosen to administer large commercial cases in Singapore is the Singapore International Arbitration Centre (SIAC). The International Centre for Dispute Resolution (ICDR), which was established in 1996 by the American Arbitration Association (AAA) for the purpose of administering international disputes, also has an office in Singapore.
 
Preparatory Steps
Whichever option is chosen, CFOs and their advisors should be careful to draft a clear, unambiguous arbitration agreement that properly indicates an intention to arbitrate and the agreed arbitral procedure. Failure to do so too often results in costly pre-arbitral jurisdictional disputes.
 
Do not leave the arbitration agreement to the very end of negotiations, and take appropriate advice if you are unfamiliar with the legal regime under which you are operating.
 
It pays to keep detailed and accurate records. Contemporaneous documentary evidence can be vital in proving a case and is more difficult to discredit than witness evidence.
 
It is also important to be familiar with your contract, particularly any deadlines or other conditions which impact upon the parties’ rights and obligations. Frequently parties do not understand their own contract and/or fail to meet simple deadlines with drastic consequences for their future rights.
 
When a Dispute Becomes Likely
Parties should ensure appropriate document preservation practices are in place. This ensures that documents are ready and available during the case preparation and pleading phase of any arbitration or litigation. This will also reduce the time and costs involved in responding to document production orders.
 
You should also take steps to ensure that legal advice and other internal discussions relating to the dispute are ‘privileged’ and therefore protected from disclosure.
 
Be ready to engage in settlement talks. Although arbitration normally only takes place when there has been a breakdown of relations between the parties, the process itself does not impede commercial negotiations.
 
Often arbitration clauses will require the parties to undergo a period of good-faith negotiation before a request for arbitration may validly be made. In practice negotiations continue during the arbitration – with many arbitration proceedings being settled before a final award is issued.
 
Settlement talks will likely be conducted on a “without prejudice” basis, meaning they are not divulged to the arbitration tribunal. Should the parties settle during the arbitral process, the tribunal can make an arbitration award by consent, listing the main terms of the settlement, which is then enforceable around the world in the usual manner under the New York Convention.
 
This negates the need to bring fresh proceedings upon breach of the settlement agreement should one of the parties fail to meet their settlement obligations.  
 
Mediation Vs. Arbitration
It is also common for parties to arbitration proceedings to undertake a period of mediation at some point prior to or even during the arbitration proceedings.
 
Mediation involves the appointment by the parties of an independent neutral, charged with facilitating an agreement between the parties. Unlike arbitration, it does not lead to a decision that is binding on the parties. This contrasts with the role of an arbitrator, whose job it is to decide the dispute, which he or she does by making an arbitral award.
 
In certain dispute-resolution traditions, notably in China, it is not uncommon for the arbitrator to switch roles from the “adjudicative” role of an arbitrator to the “facilitative” role of the mediator.
 
This procedure – known as “med-arb” – is controversial. On the one hand, it offers even greater flexibility and in many cases can lead to the timely and satisfactory resolution of a dispute. On the other, many argue that the procedure compromises the arbitrator’s role.
 
For mediation to work, parties need to open up to the mediator and candidly discuss the strengths and weaknesses of their case and the points on which they are prepared to compromise. The risk, therefore, is that during any mediation process the arbitrator will become privy to confidential information that is damaging to the parties’ legal position in the arbitration.
 
Should the mediation fail, as a practical matter it is impossible for the arbitrator to dismiss such information, which may influence the award. 
 
What About Costs?
CFOs may be particularly concerned to limit the cost of a contract’s chosen dispute resolution mechanism. While it is difficult to compare the costs to a business of pursuing arbitration as opposed to litigation, arbitration is sometimes recommended as a cheaper alternative. In fact, in the authors’ experience, complex, international arbitration can be just as expensive as litigation.
 
But the enhanced flexibility, neutrality and enforceability mean participants get more bang for their buck. Parties can craft a process with which they are comfortable, before a neutral tribunal whom they know and respect, while knowing that the resulting award will be enforceable.
 
About the Authors

An arbitration lawyer, James Rogers is a Partner at global legal practice Norton Rose Fulbright. Matthew Townsend is an Associate in the same firm. 

 

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