ABCs for Chinese Parties to Know about US Arbitration

Nov 2020

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  1. Chinese enterprises are becoming more and more familiar with international arbitration procedure. But compared to arbitration in European and Asian arbitration institutions such as ICC, LCIA, HKIAC and SIAC, they have relatively less knowledge about US arbitration. Despite Chinese enterprises rarely proposing a US arbitration clause, US arbitrations are very common in cross-border transactions.
  2. US arbitration has its own features, especially as some institutions have rules which differ from other institution rules quite significantly. This article will briefly introduce features which Chinese enterprises need to know.

Feature 1: Multiple sets of rules

  1. US arbitration institutions make multiple sets of rules for different type of cases. Take AAA (American Arbitration Association) as an example. AAA has Commercial Arbitration Rules and Mediation Procedures (“AAA Commercial Rules“), International Dispute Resolution Procedures (“AAA International Rules“), as well as a large number of specialized dispute resolution rules on construction, consumer, employment, labor, health care, wireless communication, election disputes, etc.
  2. For commercial arbitration, AAA Commercial Rules mainly apply to domestic arbitration cases in America, while AAA International Rules generally apply to international arbitration cases between US and foreign parties.
  3. Most arbitration institutions outside of the USA issue one set of uniform commercial arbitration rules, unlike the AAA. Some rules like the CIETAC Rules apply uniformly in domestic and international cases, except that some specific stipulations on domestic arbitration procedure are contained in one chapter. Other rules, such as the ICC rules, even do not include provisions for domestic arbitration cases.
  4. If parties choose AAA arbitration, they need to pay special attention to which rules are stipulated under the arbitration agreement to avoid unnecessary dispute and increase of arbitration cost. For example, although AAA Commercial Rules are typically applied in domestic cases, parties are not prohibited from choosing to apply AAA Commercial Rules in international cases. [1]There have been cases where parties located in different countries agreed to apply “AAA commercial rules” (note the use of lowercase) and then had a dispute over whether AAA Commercial Rules or AAA International Rules shall be applied.

Feature 2: The arbitral award can be appealed

  1. The arbitral award is usually final. However, AAA and CPR ((International Institute for Conflict Prevention & Resolution) provide appellate arbitration rules, aiming to fulfil parties’ desire to have an appeal mechanism against arbitral awards. Parties may file an appeal for substantive matters, such as application of wrong law or incorrect fact determination. However, parties’ agreement or relevant stipulations are required for application of appellate arbitration rules.

Feature 3: arbitration is not absolutely confidential

  1. Most Chinese enterprises’ understanding of arbitration is that it is confidential. They consider that arbitration is confidential by nature, and no special agreement is required. But in fact, in USA arbitrations, confidentiality depends on the specific arbitration rules. For example, the AAA Commercial Rules do not require confidentiality of arbitral proceedings, and merely provide that the arbitral tribunal may issue orders for confidentiality on limited issues (such as production of confidential documents).[2] Article 37 of the AAA International Rules only require arbitrators and administrators to abide by confidentiality obligations, with no stipulations on parties being obliged to keep matters confidential.
  2. In recent years, confidentiality of international arbitration has been questioned because of issues relating to inconsistent standards of adjudication and fairness of arbitral awards. The ICC has made some attempts to solve problems arising from confidentiality, such as requiring that information about the members of the tribunal shall be public, and that the arbitral award can be conditionally public. [3]

Feature 4: The list of arbitrators is not public

  1. AAA does not have a publicly available list of arbitrators. After the commencement of arbitral proceedings, AAA will provide a short candidate list of around 10 persons for the parties to select.
  2. CPR adopts a system to provide a list of arbitrators upon payment of a fee. Companies or law firms can register as CPR members by paying a membership fee, then obtain a list of neutral arbitrators. Non-members can also pay USD 1,500 to obtain the list.

Feature 5: Special Payment method

  1. Chinese enterprises are used to paying arbitration fees by wire transfer. In most domestic and international arbitration cases, arbitration institutions often provide various payment methods such as wire transfer and cheque. However, in AAA’s notice of payment, the default payment method is usually only cheque or credit card. If parties want to pay by wire transfer, they need to ask the AAA for bank account information separately. Cheque and credit card are not typically used by Chinese enterprises.

Feature 6: American Litigation Style

  1. AAA Commercial Rules have some American litigation characteristics. For example:
  • Detailed arbitration documents (such as statement of claim, statement of defense, etc.) are not required to be submitted before the hearing;
  • Specific provisions on evidence production: arbitrators can directly summon witnesses; depositions[4] can be adopted to obtain testimony of witnesses, etc.

Such characteristics of U.S. litigation are relatively weak under AAA International Rules. For example, Article 21 (10) provides that in principle, evidence production in American court proceedings (such as depositions, interrogatories[5], requests to admit[6]) shall not be applied.

Feature 7: Flexible procedure and high cost uncertainty

  1. In arbitration, one goal is often to improve arbitration efficiency and control arbitration costs. Arbitration institutions often take measures to achieve this, such as the following:
  • Control the procedural flow and expenses of the arbitral tribunal. LCIA and CIETAC Rules clearly provide for rounds and deadline of submissions.
  • Security for costs to prevent abusive and extravagant claims. This requires the applicant to pay a deposit in advance to provide a security for the respondent’s arbitration costs, to protect the respondent in case the claim fails. LCIA and HKIAC rules both include such provisions.
  • Cost allocation. The rules of most arbitration institutions require the arbitral tribunal to decide on cost allocation in arbitral awards, and the losing party usually bears the cost of the winning party. ICC rules further provide that even if one party withdraws the claim before the rendering of a final award, the arbitral tribunal shall decide on allocation of cost.[7]
  1. AAA and CPR rules also include some mechanisms to save costs. For example, CPR Guidelines on Early Disposition of Issues in Arbitration encourage the arbitral tribunal to deal with issues including jurisdiction in advance to narrow the scope of disputes. But in general, both AAA and CPR procedure empower the arbitral tribunal with a relatively broad discretion, and there are no clear provisions on costs of arbitration proceedings (especially in respect of the submission of a Request for Arbitration, Defense, etc.). Being influenced by British and American judicial culture and system, the arbitral tribunal has wide discretion and arbitration institutions rarely intervene. This huge flexibility of American arbitration tribunals increases the uncertainty of cost of an arbitral proceeding.
  2. In conclusion, arbitration in America has its own characteristics. Learning about these will help Chinese enterprises to prevent and control risks and deal with disputes.

 

[1] Article R-1 (a) of AAA Commercial Rules provide that “(a) The parties shall be deemed to have made these rules a part of their arbitration agreement whenever they have provided for arbitration by the American Arbitration Association (hereinafter AAA) under its Commercial Arbitration Rules or for arbitration by the AAA of a domestic commercial dispute without specifying particular rules.”

[2] 2015 AAA Commercial Rules, R-23, Enforcement Powers of the Arbitrator, “The arbitrator shall have the authority to issue any orders necessary to enforce the provisions of rules R-21 and R-22 and to otherwise achieve a fair, efficient and economical resolution of the case, including, without limitation: (a) conditioning any exchange or production of confidential documents and information, and the admission of confidential evidence at the hearing, on appropriate orders to preserve such confidentiality;…”

[3] Article 35 of Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration published on 1 January 2019 provides that “…the Court publishes on the ICC website, for arbitrations registered as from 1 January 2016, the following information: (i) the names of the arbitrators, (ii) their nationality, (iii) their role within a tribunal, (iv) the method of their appointment, and (v) whether the arbitration is pending or closed…”; Article 41 provides that “Parties and arbitrators in ICC arbitrations accept that ICC awards made as from 1 January 2019 may be published according to the following provisions.”

[4] A deposition is one way to obtain evidence: both parties’ attorneys ask questions and obtain witness statements ahead of a hearing.

[5] An interrogatory is one way to obtain evidence: one party sends a question list to the other party for its response.

[6] A request to admit is a procedure whereby one party sends a request to the other party for its recognition of the authenticity of certain facts or evidence.

[7] Article 38.6 of ICC Rules provides that: “In the event of the withdrawal of all claims or the termination of the arbitration before the rendering of a final award, the Court shall fix the fees and expenses of the arbitrators and the ICC administrative expenses. If the parties have not agreed upon the allocation of the costs of the arbitration or other relevant issues with respect to costs, such matters shall be decided by the arbitral tribunal. If the arbitral tribunal has not been constituted at the time of such withdrawal or termination, any party may request the Court to proceed with the constitution of the arbitral tribunal in accordance with the Rules so that the arbitral tribunal may make decisions as to costs.”

 

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