Europe

When the dragon clashes with the lion: a comparison of arbitration rules in the UK and China

In the fourth and final part of the series on Chinese investment in the UK, David Zhou Yi and Donna Goldsworthy contrast the arbitration systems of each country

rapid increase in local house prices has contributed to a booming real estate market in China. Driven by factors such as limited channels for investment in China, the appreciation of the renminbi (China’s local currency), the relatively lower price of overseas properties and the desire to provide their children with better educational opportunities, more and more Chinese investors are looking abroad, aka “globalised asset allocation”. The UK has become a favourite destination for the Chinese, due not only to its stable economy but also its established legal system, which strongly protects the interests of foreign investors. However, where there are business transactions, disputes at some point usually follow.

Chinese companies and individuals are prudent investors who seek legal advice on the risks involved and dispute resolution mechanisms in place before they make up their minds to invest monies to buy property in the UK. But although most are experienced players in local markets, most Chinese investors are still newcomers and unfamiliar with the legal regime in the UK.

For people facing a dispute in China, filing a lawsuit, rather than commencing arbitration proceedings, will be the usual first choice of action. In contrast, arbitration plays a vital role in resolving disputes in the UK.

It is important to understand how the arbitration systems in both China and the UK work. This article compares the rules of the China International Economic and Trade Arbitration Commission (“CIETAC”) and the London Court of International Arbitration (“LCIA”). Both are highly regarded arbitral institutions known by a great number of people in China and the UK, and a comparison will highlight some of the confusing issues that Chinese investors need to appreciate when investing in the UK real estate market.

Arbitration fees and costs

Most people, especially the Chinese, are strongly in favour of an unambiguous and predictable fee budget. The CIETAC rules set forth a schedule upon which the applicant can work out the arbitration fees, including the arbitrators’ costs, subject to the claim amount. Lawyers must produce a clear indication of the arbitration fees and costs involved, if requested by the clients.

By contrast, the LCIA’s arbitration charges and fees are not based on the sums in dispute but, along with legal costs, will be at the discretion of the Arbitral Tribunal. The time actually spent by the arbitrators will be one of the important considerations in calculating certain charges and fees. A Chinese party needs to understand therefore that it is unlikely that he or she will obtain in advance a specific figure for arbitration fees and costs involving an arbitration case in the UK. Variable factors such as the parties’ conduct in the arbitration, including any cooperation in facilitating the proceedings as to time and costs and any non-cooperation resulting in undue delay and unnecessary expenses, will be considered by the Arbitral Tribunal, which can have a significant impact on the final costs a party has to pay.

By contrast, in Chinese arbitration proceedings the claimant will prepay the set arbitration fees and costs at the time of filing the arbitration. In LCIA arbitrations, each of the parties will be notified in advance for every payment of arbitrators’ fees, and the claimant may need to pay for the respondent if it fails to pay its part of the arbitrators’ fees in order to facilitate the proceedings going ahead. 

Appointment of arbitrators

In China, arbitrators are required to be appointed at the very beginning of the proceedings. The parties are empowered to nominate the arbitrators without needing to have particular provisions regarding this in the arbitration agreement. Under the CIETAC rules, the parties are free to nominate the arbitrators from the panel of arbitrators, and nomination outside the panel should only be approved by the chairman of the CIETAC.

According to the LCIA rules, the arbitrators will normally be selected by the LCIA unless the parties agree to nominate arbitrators for appointment by the LCIA. The criteria or standard for selection of the arbitrator can also be negotiated in the arbitration agreement, to which the LCIA will have due regard. However, the LCIA retains its discretion to refuse to appoint a party-nominated arbitrator if it believes that the nominated arbitrator is not impartial or “suitable”.

Considerations as to the selection of arbitrator may include nationality, location of the parties, the seat of the arbitration and the working language, etc. Indeed, under the LCIA rules, special emphasis is laid on the nationality of the arbitrator. These state that the sole arbitrator or the presiding arbitrator shall not have the same nationality as either party, if the arbitration involves parties from different countries.

It should also be noted that, under the LCIA rules, a sole arbitrator will normally be appointed, unless a tribunal with three arbitrators is agreed by the parties or the LCIA considers it is more suitable. Therefore, if the Chinese party would like to have a three-arbitrator tribunal in charge of the case, it is essential to include this in the arbitration agreement at the outset.

Disclosure of evidence

Just as in court proceedings in China, in an arbitration case in the country the parties will follow the doctrine of “he who asserts must prove” and adduce the evidence supporting each party’s arguments. The party only needs to put forward the evidence in support of its claim or defence and there is limited power under Chinese law for one party to force the other party to produce the evidence it considers necessary to disclose.

Requirements over evidence in Chinese arbitration proceedings are also quite strict and technical. For example, all the evidence originating outside of China must be notarised and legalised overseas and submitted together with its Chinese translation. The parties will usually cross-examine the evidence on the documents’ authenticity, legality and relevance, and the originals should be provided for verification. It is therefore not uncommon that a party may deny the evidential effect just because the document is a faxed copy.

Disclosure of evidence in UK arbitration proceedings can be much broader. The LCIA rules confirm that a tribunal will have a broad discretion to settle any disclosure/production processes. They also emphasise that any arbitration should be conducted in an expeditious and cost effective manner. Article 22 of the LCIA rules gives the tribunal wide powers over disclosure and discovery. By Article 22.1(iv) the tribunal may order a party to make “any property, site or thing under its control”, which relates to the subject of the arbitration, available for inspection by the tribunal, the other parties and any expert.

Timeframe for arbitration proceedings

Most Chinese arbitration institutions’ rules set forth a fixed time period to settle a case. The CIETAC promises in its rules that the award should be rendered within six months from the date when the arbitral tribunal was formed. A time extension is possible in complex cases – subject to the approval by the president of the CIETAC’s Arbitration Court.

In arbitrations in the UK, the LCIA rules do not provide a time limit for the trial of the cases. Notwithstanding this, according to the LCIA’s statistics, around half of all cases are typically concluded in 12 months or less from the request for arbitration and more than three quarters in 18 months or less. Generally speaking, Chinese parties therefore need to be more patient and expect a longer process when dealing with a UK arbitration case.

Appeal on arbitral award

The Arbitration Law of the People’s Republic of China and the CIETAC rules both stipulate that the arbitral awards should be final and binding upon the parties, which implies that appeals with regard to the validity of the arbitral awards will not be accepted. Those Chinese parties familiar with this “finality of arbitral award” principle will need to understand the appeal process on an arbitral award in the UK arbitration proceedings.

Under the Arbitration Act 1996 (“the Act”), an arbitration award can be challenged in the English courts on three grounds: (i) challenging the tribunal’s substantive jurisdiction (section 67 of the Act); (ii) challenging the award on the grounds of serious irregularity affecting the tribunal (section 68 of the Act); and (iii) an appeal on a point of law (section 69 of the Act). The rights of appeal under sections 67 and 68 are “mandatory provisions” and the parties are unable to “contract out” of them. They would cover extreme cases, such as lack of consensus in choosing arbitration, or bias on the part of a panel member. The right to appeal on a point of law, under section 69 of the Act, does not allow findings of fact or procedural errors to be reviewed. The parties are free to exclude rights to appeal on a point of law and it is common for such rights to be waived or circumscribed by the arbitration agreement or the relevant rules of arbitration.

Forewarned is forearmed

With more Chinese investors entering the UK real estate market, disputes concerning such investments will inevitably rise. Investors considering an Anglo-Chinese real estate joint venture therefore need to take heed if they wish to avoid “waking the sleeping lion” and finding themselves amid an unfamiliar dispute resolution process. Chinese parties, familiar with their nation’s system, will need to be aware of the differences between the jurisdictions before they choose their dispute resolution mechanisms. It is therefore essential that local counsel’s advice is sought at the beginning of a deal or as soon as a there is a hint of a possible dispute arising with the counterparty. Forewarned is forearmed.

David Zhou Yi is a partner at Co-effort Law Firm LLP in China and Donna Goldsworthy is a commercial litigation partner at Irwin Mitchell in London

This article is also available in Chinese at http://globalrealestateinsight.com/wp-content/uploads/2016/04/UK-China-arbitration.pdf

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