In December last year, a Hong Kong arbitration panel ruled that China MediaExpress Holdings Inc was a "fraudulent enterprise" and awarded $77 million to Starr Investments, a firm run by former AIG chief Maurice Greenberg. According to Reuters, Starr had sued China MediaExpress in 2011, saying it had been fraudulently induced to invest in the advertising firm, whose shares were subsequently delisted from the stock exchange in the United States. Starr, which also sued China MediaExpress auditor Deloitte Touche Tohmatsu, had made a total investment of about $53.5 million in China MediaExpress.
The three-judge panel in Hong Kong ordered the three founders of China MediaExpress to pay damages of about $77 million to Starr Investments. Reuters reported that the Chinese company had filed with the U.S. Securities and Exchange Commission (SEC) saying it was a television advertising operator on intercity and airport express buses in China. However, the arbitration panel in its ruling said the company "never had the business it represented to the world that it had or that, if it did, it has been ravished by dishonest conduct on the part of those who conducted the business."
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damages of about $77 million to Starr Investments. Reuters reported that the Chinese company had filed with the U.S. Securities and Exchange Commission (SEC) saying it was a television advertising operator on intercity and airport express buses in China. However, the arbitration panel in its ruling said the company "never had the business it represented to the world that it had or that, if it did, it has been ravished by dishonest conduct on the part of those who conducted the business."While the China MediaExpress case might have been another example of fraudulent behaviour on the part of Chinese companies listed in the U.S., it also put into focus the importance of offshore arbitration for mainland-related disputes, and the continuing importance of Hong Kong as a seat for the same. “Provided that it is commercially and legally feasible, our international clients usually prefer and we usually recommend offshore arbitration (often Hong Kong arbitration) in cross border deals with Chinese parties,” says Cameron Hassall, partner at Clifford Chance and head of the firm's Hong Kong and China arbitration practice. “China has developed over the last 10 years in particular a quite good record of enforcement of offshore arbitration awards, and so one can usually be confident that an award from Hong Kong or another sophisticated and well-regarded seat or venue will be enforced in China.”
More for offshore
Lawyers agree that arbitration in China has come a long way in the past few decades. “Over the years, we have seen an improvement in the quality of arbitrations in China, and it is certainly moving in the correct direction,” says John Choong, counsel at Freshfields. And while the perception remains in some quarters that Chinese tribunals don’t enjoy a great reputation for transparency or fairness, this is a notion that lawyers tend to underplay. “Each panel or tribunal differs and so one can't, in my view, fairly say that tribunals from one country or another are not transparent or fair,” says Hassall. “My own experience of China arbitration has been positive. Inevitably, local prejudices can and do exist, and cultural differences can also give an impression of a lack of transparency or fairness.”
May Tai, a partner in Herbert Smith Freehills’ dispute resolution practice, feels that it is “unfair” to say that Chinese tribunals don’t enjoy a good reputation. “What people don’t realise is that arbitration in China is a very different product, and follows very different procedures, from arbitration elsewhere,” she says. “Mainland arbitration is a lot like mainland court proceedings; it’s a civil law jurisdiction, which means that it’s not adversarial. You don’t have witnesses or witness statements. A U.S. party coming to China for arbitration would think it was an appalling system, but that’s because it’s nothing like the U.S. system.”
According to Denis Brock, a Hong Kong-based partner with King & Wood Mallesons who specialises in litigation and arbitration, the perception that Chinese tribunals are not fair would have been valid 25 or 30 years ago. Today, it comes down to the arbitrators that comprise the tribunal. “That’s quite an important issue when you’re drafting the arbitration clause to ensure you create a high degree of international participation in that panel,” he says. “Let’s take a U.S. investor and a Chinese counter-party. The U.S. party, if it subjects itself to Chinese arbitration, is going to want to appoint an American, Briton or Australian to be its arbitrator. And the Chinese party will probably appoint someone from mainland China as its arbitrator. If you regulate the clause to say that the third arbitrator, howsoever appointed, should not be a national or citizen, or resident of either contracting party, you preclude the third arbitrator being either Chinese or American. And then you have objectively a fair panel, as it might comprise a Chinese arbitrator, an American arbitrator and, say, a Swedish arbitrator. If they’re not fair, then you’ve probably just got a bad case.”
However, Brock notes that international clients still entering into agreements with Chinese entities still prefer to have arbitration in a neutral territory. “If they’re doing an inbound investment deal, or another kind of deal, with a Chinese party, then howsoever good CIETAC or BAC may be, there is still the preference for arbitration in neutral territories,” he says. “So if there’s investment by a U.S. company into China, it makes it a good idea to have arbitration in, say, Hong Kong. And that’s for a host of reasons, not the least of which is the very strong judicial support for arbitration that we have in Hong Kong, and the very able leading international arbitration centre in Hong Kong that can administer very professionally international arbitration disputes such as the China MediaExpress one.”
The importance of Hong Kong
Hassall notes that Chinese and offshore parties are “rightly comfortable” with Hong Kong as a seat for China-related arbitrations, and so Hong Kong is often an easily agreed neutral venue for China related arbitrations. “For the Chinese party, Hong Kong has returned to Chinese sovereignty, and is obviously close to China from both a cultural and geographical perspective,” he says. “For the international party, Hong Kong has a long history as a leading seat for international arbitration, an open, reliable and independent legal system and is easily accessible, business friendly and efficient.”
Brock says that there is a whole host of reasons why Hong Kong remains an important venue as well as seat for such arbitration cases. “First of all, arbitration is governed by common law; when you’re selecting a venue for arbitration, you think of the legal regime that surrounds it. The arbitration is seated in a place, and the arbitration is being governed by the laws and legal regime of that place. So if you have an arbitration in Hong Kong, you get all the machinery and mechanism of Hong Kong arbitration law and the Hong Kong courts,” he says. These are very pro-arbitration in terms of dispute clauses, assisting references as they progress, and enforcing awards promptly and efficiently.”
Additionally, he notes that Hong Kong is home to just about every major law firm in the area of arbitration as well as the necessary people. “There are thousands of lawyers in Hong Kong, and maybe a hundred or so internationally recognised arbitration practitioners resident here,” he says. “In addition to that, you have huge numbers of arbitrators who either live in, or make themselves available in Hong Kong. The territory also has many, many thousands of accountants, engineers, surveyors, architects, who provide critical forensic support.”
And then there are the more basic factors, not the least of which is that Hong Kong is a trilingual community, which means handling matters in Chinese is not a problem. “Also, Hong Kong as a place is very convenient; there are very few places in the world from where you can’t get to the territory, and that’s very important when you want to get witnesses here,” says Brock. “As a ‘world city’, it has all the infrastructure you need: Hotels, restaurants, all that you need to spend time in the city.” The trump card, he notes, that Hong Kong as a matter of policy has an “open skies” jurisdiction, which means that foreign lawyers and arbitrators can appear in Hong Kong arbitrations without any formality, even under a Hong Kong law dispute. “So even if Hong Kong law governs the arbitration, Hong Kong law governs the contract, and the dispute is in Hong Kong, you can have any lawyer from any place in the world come and represent you,” he says. “If you want to be represented by, say, your very favourite Brazilian lawyer, then you can be.”
Finally, Brock notes that while Hong Kong is a separate and distinct jurisdiction from China, and not very different to the Hong Kong before handover in terms of judicial mechanism and laws, from a Chinese perspective, it is part of sovereign Chinese territory, and also very easy to get to. “A Chinese businessman doesn’t feel like he’s travelling to a foreign country to conduct his arbitration, so he can get over the fact that he’s lost out on getting Beijing or Shanghai,” he adds. “He doesn’t feel so hard done if he has to go to Hong Kong.”
Enforcement issues
Once an arbitral award has been obtained against a Chinese company, then comes the issue of enforcement. Choong of Freshfields says that the likelihood of successfully enforcing awards against Chinese companies varies considerably, depending on a number of factors, such as how well connected the counter-party is, the type of assets being enforced against, and the court handling the application. “In general, however, it is becoming easier to enforce arbitral awards in China, as Chinese courts become more familiar with arbitration,” he says.
Brock of King & Wood Mallesons agrees that it’s enforcement is easier, particularly as China is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention), which became effective in China in 1987. “There’s always the potential for mischief, and ‘public policy’ can be one of the issues raised,” he says. “This can cause difficulties if you’re trying to liquidate massive assets that can adversely affect a large number of people. However, even in this case, you have more chance of obtaining an arbitral award, because of convention obligations, than you’ll have with a foreign court judgment.” However, he adds that for the contracting party, the best thing to do is to ensure that the Chinese counter-party has assets offshore in a place where enforcement is not so problematic.
For Herbert Smith Freehills’ Tai, much depends on the position that the Chinese company is in. “If it has enforceable assets, if it has expanded outside of China, if it wants to continue doing business outside, and its reputation is being damaged by the arbitral award, then it will pay,” she says. “To that extent, I don’t think they’re very different from enforcing against other parties. If, for example, the Chinese company is bankrupt or in financial difficulties, or one of these fly-by-night type of organisations, then of course it’s not going to pay and will try to avoid it, just like any other company.”
However, she notes that where China is a bit more difficult is that the court procedure is not that sophisticated when it comes to seizing assets. “In certain jurisdictions like Hong Kong or Singapore, it’s very easy to go into courts and get an ex-parte order to get a disclosure statement of every asset that the other side has,” she says. “In China, they just don’t have that sophistication to do that. Having said that, they don’t have those procedures available for domestic litigation either, so it’s not like in arbitration you are prejudiced. It’s just that in the country as a whole the legal system is not that sophisticated.”
Advice to clients
Tai says that the advice she gives to clients depends on the kind of investment involved; however, for international parties in China-seated arbitrations, the key is to make the arbitral process more familiar, in terms of language and neutral nationality arbitrators. “However, for those who have the option of arbitrating outside of China, we recommend that they try and do that,” she says.
Choong also highlights the importance of the neutral seat. “For disputes involving foreign and Chinese parties, it is often important for foreign parties to insist on arbitrating outside China, in a third party seat such as Hong Kong,” he says. “Indeed, in our experience, while many foreign parties are still prepared to agree to Chinese law as the governing law of their contracts, they will often insist on arbitrating outside China, in a neutral seat.”
Brock says his advice to clients includes a number of practical tips. “First of all, you have to use an institution – it’s just not worth taking the risk to use ad hoc arbitration because of enforcement difficulties – and whether you use the LCIA or HKIAC, make sure you use the institution’s model clause,” he says. “You’re more likely to get it right than wrong. And if the institution doesn’t have any provision related to the nationality of arbitrators, make sure you put a provision in.” Mention the seat and the venue is very important, he says. “If you’re particularly anxious that your arbitration should take place in Hong Kong as well as being seated in Hong Kong, then say so in the contract,” says Brock. “It’ll preclude the hearings from taking place in Mauritius, Singapore or wherever.” Other things to make clear in the arbitration clause are the language and number of arbitrators. And when it comes to investment contracts, considerations should be given as to how the deal is routed. “If your home country doesn’t have a Bilateral Investment Treaty (BIT) with China, and there’s another BIT treaty that’s more attractive, then by using your subsidiary and creating an SPV, you can route the transaction through that subsidiary being in a third-party country, and then get the benefit of the bilateral treaty between that country and China,” Brock adds. “Now there are some tax issues there, but I’d prefer the tax issues hurt us now rather than some investment arbitration down the road.”
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