Op-Ed Commentary: Chris Devonshire-Ellis
Jan. 24 – The successful awarding of US$77 million in damages by a Hong Kong arbitration panel against a China-based business highlights the importance of securing the arbitration rights in jurisdictions beyond Mainland China when assessing disputes involving assets primarily based on the mainland. The case, brought by Starr International (an investment vehicle run by former chairman of AIG, Maurice Greenberg), filed to a Delaware court the findings of an arbitration committee in Hong Kong that had convened to determine whether Starr had been fraudulently induced to invest in Fujian-based media company China MediaExpress Inc. The full story concerning the background to the case is featured in the Wall Street Journal here.
While much of the commentary deals with the now well-publicized aspect of fraudulent behavior concerning the listing of Chinese-owned entities in the United States, other important elements have highlighted the desirability of arbitration being held externally from Mainland China. Regrettably, arbitration panels on the mainland do not enjoy a reputation for either transparency or fairness, and are often charged with favoring the Chinese party over any foreign involvement. Part of this is based on sheer prejudice, part is due to insufficient legal wording concerning China’s signatory status with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), which became effective in China in 1987.
That document provides that signatory states may refuse to recognize and enforce arbitral awards that are contrary to the state’s “public policy.” For the purposes of this “public policy exception,” the Chinese courts have generally accepted the terminology in Article 258 of the Civil Procedural Law of PRC, which provides that a court may refuse the enforcement of an arbitral award if it determines that the award is against the “social and public interest” of China. With such a loophole, the old chestnut of dealing with state-owned enterprises and the enforcing of awards against them as being “against the public interest” can be easily used as an excuse not to pass judgment against Chinese businesses. Hence the need to look carefully at arbitration clauses involving businesses based in China.
China is also a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention or Washington Convention). However, China has only submitted to the jurisdiction of ICSID for disputes concerning compensation for expropriation and nationalization, and tends to favor instead the New York Convention.
The importance of Hong Kong as an arbitration center becomes apparent when one considers that China has also entered into special bilateral arbitration arrangements with Taiwan, Hong Kong and Macau. In 2000, the Supreme People’s Court of PRC gave effect to the Arrangement for the Reciprocal Enforcement of Arbitral Awards between the Mainland and Hong Kong (the 2000 Arrangement). The 2000 Arrangement provides that the recognition and enforcement of arbitral awards rendered in Hong Kong may be refused by courts in Mainland China only on the grounds identical to those listed in Article V of the New York Convention. It also obligates the Hong Kong courts to enforce any arbitral awards made by one of the recognized 180 China arbitration commissions (thus excluding arbitral awards rendered in ad hoc arbitration proceedings). In practical terms, the effect of the 2000 Arrangement is that arbitral awards rendered in Hong Kong are treated just like arbitral awards rendered in any signatory to the New York Convention, and thereby makes Hong Kong a comparatively safe place to arbitrate against Chinese parties.
China has a good track record in upholding Hong Kong’s legitimacy – meaning that Starr’s lawyers did a good job when arranging for arbitration to be held in Hong Kong as opposed to Mainland China, where the defendant is based. Consequently, Starr now has a good chance of being able to enforce collection of the award.
The Wall Street Journal described Starr’s success as “rare.” With some 45 class action motions launched against Chinese reverse merger companies listed in the U.S. between 2010 and mid-2012, and some 126 Chinese companies having either been delisted from U.S. exchanges or have “gone dark” (meaning that they are no longer filing current reports with the Securities & Exchange Commission), the difficulties in obtaining satisfaction from Chinese companies have been well documented. The Starr case, at least for now, demonstrates the importance of getting both arbitration and the correct domicile into investment contracts, and provides an important lesson in mitigating against the vagaries of China’s own commitments to the treaties it has signed.
Chris Devonshire-Ellis is the principal of Dezan Shira & Associates and is based from their Singapore office. The firm assists foreign investors across Asia and maintains offices throughout China, Hong Kong, India, Vietnam and Singapore. For assistance or advice concerning arbitration issues in China or Hong Kong, please contact the firm’s legal services division at email@example.com or visit the practice website at www.dezshira.com.
China Briefing – Financial Management
This issue of China Briefing details FCPA regulations, fraudulent accounting practices within Chinese companies and due diligence issues for IPO listings. It also covers PRC GAAP regulations, compliance with them and the differences between EU and U.S. standards.
Hague Conference Establishes Asia-Pacific Regional Office in Hong Kong
Hong Kong’s New Arbitration Law Improves China Dispute Resolution
Hong Kong Promoted to Prime Center for Arbitration
Dispute Resolution in China – The Disintegration of CIETAC