An approach to International Arbitration China & Latin America.
By Nicolás Ossa
Introduction.
Ready to come in force –on October 1st- was left the Free Trade Agreement between Chile and China last August, after being ratified unanimously in the Chilean Congress. In this form, the first treaty of this type which China signs with another non Asian country, has concluded its legislative proceeding in Chile. With 1,300,000,000.00 inhabitants and a maintained economic growth of between 8 and 10 % in the last decade, China is doubtlessly and vertiginously rapid a more starring actor in the global policy and economy. For many people, the overwhelming phenomenon led by this country is considered even like a “second industrial revolution”. For Chile, the investment possibilities are multiplied in more than a hundred times, to increase the scale of production and to take the best advantages of all the natural resources that the country already has.
Multiple benefits of China-Chile FTA.
During last year 2005, commercial interchange between Chile and China reached the U$S7,000 million, transforming the PRC into Chile’s second commercial partner (after the U.S.) Considering it, the subscription of the FTA with the Asian power is outlined like an instrument that will be extremely useful to sustain a maintained growth of Chilean exports, granting to Chilean exporters an unquestionable advantage before its competitors, when counting on preferential access to such market and certain permanent rules for the development of their businesses. In particular, it is esteemed that the FTA with China will allow Chile to strongly harnessing the exports of agricultural, cattle, forest and fishing products, changing therefore the present concentration in copper and cellulose. It could, in fact, turn Chile into an alimentary superpower. This agreement must be seen like a success of the Chilean commercial policy that extends the market to which the exports of our country will accede preferably, with the consequent benefit for our growth. Before this agreement, Chile already had preferential access to almost 70% of the world-wide GIP; today, that number rises to 75%, which turns Chile into one of the most commercially integrated to the world -countries.
On the other hand: Chilean consumers will benefit with goods that are not produced in Chile, which will have immediate lowering of custom tariffs and duties, such as machineries, computers, printers, cars, mobile phones, DVD's, among many others. Chilean society will be favored by the tariff reductions, increasing its entrance available and allowing the access of the consumers to a much more ample variety of goods at very competitive prices.
Chile: Country springboard for investments, and the importance of China.
In recent years, a new trend has emerged in foreign investment in Chile. Prospective investors are no longer looking only at the country's natural resources or the clear potential of its domestic market: they are also weighing its advantages as a springboard into other markets around Latin America and, indeed, in other countries around the world. In fact, Chile's swiftly-widening network of free trade agreements has been fundamental in encouraging companies to adopt this approach. The network of commercial agreements that Chile has subscribed with the countries of Latin America -in which the participation of Chile like country associated to the Common Market of South (commonly known as “MERCOSUR”) takes special relevance- added to the FTAs being negotiated with other Asian countries, and the tax legislation reform of springboard for businesses allows to create an evident and amazingly interesting scene so that Chile carries out a roll like springboard of businesses and connection bridge for the interchange of goods between the whole ASIA and LATIN AMERICA countries. Chile, along with the solid macroeconomic bases and political, institutional and legal very stable system, together with the present and future efforts in the scope of infrastructure, transports and communications, seems to have appropriate conditions to turn to their territory a platform that harnesses the businesses between Latin America and Asia.
With the subscription of the FTA with China, a great step occurs to advance in the strategy to establish narrower bonds between both regions through Chile. Not only because the Asian country is Chile’s second commercial partner, but because it is positioning gradually and permanently as one of the main commercial partners of our neighbors of the Latin American Region. To it, we have got to add the political and economic interest of Latin American countries in approaching to whom -is considered- will be the new economic superpower of the XXI century.
On the other hand, China sees in South America a source of natural resources that already is strongly contributing to maintain its high rate of growth. In fact; the commercial weight of the Asian country in the region is increasing. As an example, Chilean exports to China have been experiencing a vertiginous growth, representing today more than 10% of the total of Chilean exports (while for more than 15 years represented less than a 1%). Parallelly, the imports of the Asian country from Latin American countries have expanded remarkably in the recent years: as of year 2000, the Chinese imports from Latin America passed from US$ 5,400 million to more than US$ 22,000 million in 2005 (quadruplicated). This phenomenon has represented an annual growth of a 42% between those years, almost the double of the rate of growth of 26% of the global imports of China.
Chile, with its possible extension of the FTA to the scopes of services and investments, certainly bets to be the front door of the Chinese investments in the Latin American Region, in sectors such as energy, mining, infrastructure and agriculture, among many others.
International Trade & Investments Contracts - ASIA-LATIN AMERICA- and incoming controversies:
A brief overview of the probable scenario for International Commercial Arbitration and Alternative International Dispute Resolution.
Considering all the above explained, it seems more than probable that from now on to the mid term (3-5 years) the controversies related to ASIA – LATINAMERICA international trade contracts and investments, will be impressively numerous, enormous and very diverse and complex.
Chinese Arbitration Act 1994: Arbitration Legislation.
The Chinese law endorses arbitration as a useful method for resolving international commercial and investment disputes, and the practice also exhibits a strong preference for arbitration of disputes arising out of business transactions.
The “Arbitration Act of the People's Republic of China”, the first one in the history of the PRC, was enacted on 31 August 1994 by the National People's Congress (legislative body of the PRC), influenced by the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. The Act came into effect on 1 September 1995 (the CA 1994). The CAÁ 1994 applies to both domestic and international (foreign-related) arbitration in China. Under the CA 1994, arbitration agreement is the basis for arbitration. A valid arbitration agreement is the prerequisite for and condictio sine qua non for arbitration bodies to accept the cases. Arbitration shall be conducted independently and never be subject to any interference from administrative authorities, social organizations or individuals. An arbitral award shall be final and binding on both parties, and has res judicata effect. Such awards can be effectively enforced by courts. One of the salient features of the CA 1994 is that it accords the international arbitration a special treatment.
China International Arbitration.
Since the 195Os, China has, by international practice, adopted the voluntary arbitration and the final award system. As early as 1956 and 1959, the first two international arbitration institutions, China International Economic and Trade Arbitration Commission (CIETAC) –the most important for our analysis- and the China Maritime Arbitration Commission (CMAC) were founded under the auspices of the China Council for the Promotion of International Trade (CCPIT) /China Chamber of International Commerce (CCOIC). All the international arbitration cases were submitted to CIETAC and CMAC for arbitration. Therefore, until the CA 1994, the international arbitration in China means no more than the arbitral proceedings conducted by CIETAC and CMAC.
After the CA 1994, although other arbitration institutions may also accept international cases, almost all the international arbitration cases are still filed to CIETAC for arbitration by the parties.
The CIETAC.
China International Economic and Trade Arbitration Commission (CIETAC), also called the “Arbitration Court of the China Chamber of International Commerce”, has formulated its own rules of arbitration procedure. The Provisional Rules of Arbitration Procedure were formulated when the Arbitration Commission was established (1980). But to meet the demands of its development, the Arbitration Commission amended its arbitration rules respectively in 1988,1994,1995,1998, 2000 and 2005. The current Arbitration Rules are effective as from May 1st, 2005. According to the current Arbitration Rules, CIETAC takes cognizance of cases over international, foreign-related and domestic disputes of a contractual or non-contractual nature in accordance with an arbitration agreement between the parties to submit their dispute to CIETAC for arbitration (an arbitration agreement means an arbitration clause in a contract concluded between the parties or any other form of written agreement providing for the settlement of disputes by arbitration:
letter, telegram, telex, facsimile, or even a simple e-mail). An arbitration agreement shall be deemed to exist where its existence is asserted by one party and not denied by the other during the exchange of the Request for Arbitration and Statement of Defense.
In 1992, the number of international cases admitted by CIETAC outstripped for the first time the LCIA and the Triple A and ranked second, just behind the ICC Court of International Arbitration, and since 1993, the number of cases taken cognizance of by CIETAC has ranked the first among arbitration institutions in the world. CIETAC has continuously developed cooperation with other international arbitration institutions. It signed arbitration cooperation agreement with nearly 30 international arbitration institutions such as the Arbitration Institute of the Stockholm Chamber of Commerce, the American Arbitration Commission and the Chartered Institute of Arbitrators, in order to develop its international status.
Practice.
As foreign businesses invest in market opportunities in China, International Arbitration has become “the” method for handling disputes with Chinese partners. Chinese arbitration processes has also increasingly gained some reputation for fair and impartial handling (without an insurmountable bias in favor of Chinese parties). However, managing an arbitration in China is, obviously, a totally different experience – legally, commercially and culturally – than we may expect from dealing with similar disputes in the U.S. or Europe.
If a Chilean part becomes involved in a dispute with a Chinese company, one of the most effective ways should certainly be to seek resolution of the dispute via CIETAC, as the best known and most highly regarded arbitration forum in China with jurisdiction over disputes between foreign enterprises operating in China and between foreign enterprises and Chinese companies.
With regard to the choice of law, Chinese law allows parties to a contract with a "foreign element" (she wai he tong) to choose the law to be applied, although in practice, Chinese parties normally insist that the contracts be governed by Chinese law. In some situations, for example, international sale and purchase agreements, it could be remotely possible to persuade the Chinese part to accept the law of another country to govern the contract.
One foreign law which may be very “acceptable” to Chinese parties is Hong Kong Law. Chinese parties who do business in Hong Kong may be familiar with it and hence may be prepared to accept this. Hong Kong Law, which is based on English Common Law, is also familiar to many foreign parties who do business internationally.
In practice, a CIETAC arbitration venued in Shanghai, Beijing, or Shenzhen (only cities where the CIETAC arbitration can take place) is relatively cost-efficient when compared to other international arbitration centers such as the ICC in Paris, the LCIA in London, or the triple A ICDR in New York. Now, as we stated above, the arbitration process is handled quite differently from the litigation process with which Latin America & the U.S. businesses may be familiar. As some practical examples: discovery basically does not exist; testimony can be oral or written; the arbitration panel may appoint its own experts; you may be asked to sign transcripts that you won’t receive, etc...
As a pair of lessons:
you have to count on local support; and,
you should never assume that arbitration in China is the same as in other venues around the world, which is –in fact- the reason why we strongly believe that you must take your time to understand the Chinese legal culture that will determinately influence the outcome of your dispute.
With the China’s entry into WTO in 2001, efforts still need to be undertaken by the Chinese government and judicial authorities to offset the negative effects of some obstacles to hamper arbitration such as protectionism so that we may create a more favorable arbitration environment for international traders and investors. In addition, the CA 1994 is also necessary to be revised so that it may further embody the usual practice and principles of modern arbitration and also further clarify the basic principles of Chinese arbitration.
Some typical doubts.
-May the foreigner be appointed to act as arbitrator in China?
In the CIETAC present Panel of Arbitrators, 158 arbitrators are from foreign countries, Hong Kong Special Administrative Region and Macao SAR as well as Taiwan region. The parties have the freedom to appoint foreigners from the Panel to act as arbitrators in China.
-Which rules shall be applied to decide the case?
According to the Arbitration Act 1994, arbitrators must decide the case in accordance with the rules of law. In light of Chinese arbitration practice, arbitrators shall, under the precondition that the decision is in compliance with law, fairly and reasonably make the award on the basis of respecting the contractual agreement of the parties and with reference to the international practice. Arbitration ex equae et bono is not allowed in China.
-Enforcement situation of the arbitral award in China.
China is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly referred to as The New York Convention. This means that any arbitral award involving a Chinese entity is generally enforceable by and against that entity, both in China and in other countries that are signatories to the New York Convention (which includes more than 125 countries, including Chile). This international enforceability of awards is one of the key advantages of arbitration.
Since 1995, People’s Court seeking to refuse enforcement of an international award or a foreign award must first obtain approval from the superior people’s court in the same jurisdiction. Any superior court that decides to uphold a lower court’s refusal to enforce an international award or a foreign award must, in turn, report its decision to the Supreme People’s Court prior to finalizing the decision to refuse enforcement. By issuing this official document, the PRC has established an internal control mechanism by which undue refusal for enforcement has also been effectively controlled.
-May ad hoc arbitration take place in China?
Ad hoc arbitration is excluded in China. China favors institutional arbitration so that the parties can get the best assistance from the arbitration institutions. But, on the other hand, the narrow criteria for the interpretation of and rigid stipulation requiring the written form of the arbitration agreement have in practice, in our opinion, become an undue absurd limitation on the correct development of commercial arbitration.
-May ICC Arbitration take place in China?
Chinese law keeps silent with regard to foreign arbitration institutions’ conducting arbitral proceedings in China. In theory, ICC International Arbitration Court may conduct its arbitration proceedings in China. On the other hand, the arbitral proceedings of ICC Arbitration must be in compliance with the compulsory provisions of Chinese Law: Under Chinese Arbitration Act, some procedural aspects concerning the validity of the arbitration agreement and the appointment of the arbitrators are different from the counterpart of the ICC Arbitration Rules. It means that if ICC Arbitration takes place in China, its arbitration proceedings would directly violate the compulsory provisions of Chinese Arbitration Act (current Arbitration Act could not be applied to ICC Arbitration in China, unless it is amended accordingly).
Some remarks.
In the past, commercial parties have often held strong preferences against arbitrating disputes in China. Whilst CIETAC’s reputation has been good, historically the reputation of the Chinese Courts has not been so strong, particularly in relation to enforcement of awards.
But China has certainly made efforts in recent years to improve, for example, by the publication of the Notice on Handling Awards Involving Foreign Interest and Foreign Arbitral Awards (1995), issued by the Supreme People’s Court. As mentioned above, it requires any People’s Court intending to refuse enforcement of a foreign arbitral award first to obtain approval from the superior People’s Court in the same jurisdiction, and any superior People’s Court proposing to uphold the lower Court’s refusal to enforce must in turn report its decision up to the Supreme People’s Court.
As China seeks to open itself to ever increasing flows of trade and foreign investment, it is crucial that foreign parties looking to trade with Chinese entities or to invest in China, like us Chileans –specially once the FTA is in full force- have confidence in the local Courts to enforce arbitration awards against Chinese parties.
Many criticize the fact that enforcement takes place at the local level, where the potential sometimes exists for local protectionism. Additionally, local Courts may lack experience in relation to international legal matters, although efforts have been made to address this problem in recent years.
Nevertheless, the measures which have already been taken and improvements that are being implemented day to day, clearly indicate China’s strong desire to make itself more attractive as n springboard for fair international arbitrations.
Founder and Principal Partner, OSSA LAWYERS & CONSULTANTS
Invited Lecturer, Arbitration Proceedings under the Fta with China and South Korea, Postdegree in International Trade and Investments & International Commercial Arbitration and ADR, Universidad Central de Chile.
CHILE (main office): Augusto Leguía Norte 100, Floor 3, El Golf, Las Condes, Santiago.
BRASIL (branch): Praia de Botafogo 190, 8° Andar, Rio de Janeiro.
CHINA (representatives ad hoc): Beijing Fortune Plaza 7 Dongsanhuan Zhonglu, Chaoyang District, Beijing.
Phones (Chile): +56 2 231.5064 Fax: +56 2 470.2901 E-mail: ossaguzman@ossaguzman.cl Web: http://www.ossaguzman.cl/
In 1991, Chile signed an FTA with Mexico and, in 1996, went on to seal an FTA with Canada and to become an associate member of the MERCOSUR trade block, formed by Argentina, Brazil, Uruguay and Paraguay. In addition, Chile has bilateral economic complementation and trade agreements with most Andean and Central American nations as well as FTAs in force with the European Union, the United States, South Korea, the EFTA block (formed Norway, Iceland, Liechtenstein and Switzerland) and know with with China. It is also currently in the process of negotiating FTAs with Singapore and New Zealand (with, together with Chile, form the so-called “P3 block”), Japan and India.
In 2002, Chile reformed its tax legislation in a bid to facilitate the country's use as a platform from which to manage investments in other markets and to encourage partnerships between foreign investors and local firms. In line with Chile's policy of minimizing tax barriers to investment, the reform means that foreign investors will no longer be liable for Chilean taxation on the earnings they derive from assets in other countries.
By exempting platform companies from Chilean tax on overseas earnings, the law addresses the problem of three-way taxation and provides foreign investors with an additional incentive for taking advantage of Chile's economic and institutional stability, its high-standard infrastructure and top-quality human resources. In addition, because a platform company can include Chilean shareholders, it can capitalize on their familiarity with other Latin American countries and their ability to detect regional business opportunities.
A number of foreign investors -attracted by Chile's world-class telecommunications infrastructure- are already using the country as a regional platform. Delta Air Lines, Air France and Hewlett-Packard are just three of the companies that have adopted this strategy. All chose Chile as the location for support and contact centers through which they channel ticket sales, respond to customers' queries and provide other services around Latin America.
A similar phenomenon is seen in the banking sector. Spain's SCH banking group uses Chile to maintain and develop processing systems for its operations around Latin America, while US-based Citigroup has decided to locate a new regional software development center in Santiago.
International companies have also begun to look at "shared services" - the centralization of in-house services, such as accounting and financial management, for subsidiaries in different countries - as a way of streamlining operational costs. And, because of its reliable telecommunications services and ready supply of highly-qualified professionals, Chile has emerged as an attractive location.
