Arbitration in China

"Western companies doing business in China are increasingly being asked to agree to what they consider a risky--proposition--to resolve disputes through arbitration in China in the event a deal goes sour. ... But some Chinese companies, especially the state-owned, are pushing for their business contracts with Western companies to stipulate that conflicts go to arbitration in mainland China. ... Among issues worrying to Western companies are how the arbitrators are chosen and paid under the Chinese system. Raising different concerns is a particular case in which an arbitrator--at that time the head of CIETAC--who sided with PepsiCo Inc. against a Chinese bottler was later detained by the Chinese authorities. Jerome Cohen, a professor of law at New York University ... served on an arbitration panel in China. ... The arbitrators ruled 2-1 in favor of the Chinese company, with Mr. Cohen the dissenter. "I was astounded,' recalls Mr. Cohen. "I saw some of the most blatant contract violations I'd ever seen, but it was like the others had been watching a different case.' ... Still, many western lawyers remain wary of certain practices they fear can undermine fairness. ... But in China, if the parties can't agree, CIETAC chooses the third [arbitrator]. 'That's an extraordinatrily risky proposition,' says Francis Kao, a lawyer at Skadden, Arps, Slate, Meagher & Flom L.L.P. Ms. Kao advises her clients to cut down the risk by putting a requirement in their business contracts that a CIETAC-appointed arbitrator meet certain qualifications. But the strategy isn't foolproof. 'You still really don't know what you're going to get,' she says. ... In March 2006, Dr. Wang was apprehended outside CIETAC's Beijing headquarters. He has been detained ever since. ... The charges against him allege financial impropriety within CIETAC, but people in the arbitration community have feared something else was at work", Ashby Jones and Andrew Batson at the WSJ, 9 May 2008.

Kao, grow up. As the Chairman taught us, "Political power grows out of the barrel of a gun". How many guns can a Chinese company command and how many can your clients command? Face it Kao, contracts in China are virtually unenforceable. I am touched by the companies concerns over arbitration. I wonder if any of the companies in question were the subject of my 17 and 27 April 2008 posts? How much do American companies like arbitration? See my 24 December 2007 post. The Chinese arbitration system looks much like our own SEC. Kao, do your clients a favor, have them contact Joel Stern, MBA (Chicago, 1964), who among other things, is a Columbia Business School professor. Why? Have him consult with them about how much each should raise its "hurdle" rate for Chinese investments since contracts in China are virtually unenforceable. By the way, I've read a lot of Stern's stuff over the years and think he is a real smart guy.