In the long run, China's forthcoming accession to the
World Trade Organization could be one of the most important steps along
the road to the rule of law that the Asian giant has ever taken. But there
is reason to suspect progress will still be slow. Consider another international
agreement of great importance to the rule of law that Beijing has signed
-- but routinely fails to honor.China is a signatory to the 1958 New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
But China's record of enforcement -- meaning, the number of times when
foreigners have actually been able to collect a monetary judgement against
a Chinese company in a People's Court -- is spotty at best. While this
doesn't get a lot of attention beyond international law specialists, the
underlying issue of the sanctity of contracts is fundamental.
Foreign companies have good reason to worry when they
try to persuade a Chinese People's Court to enforce an award from a foreign
jurisdiction. While centralized records are not kept, there are "very
few" such cases, says Pitman Potter, a law professor at the University
of British Columbia. Mr. Potter says the problem isn't with the Supreme
Court in Beijing, but in the local courts, where judges are accountable
to local powers. "While the Chinese authorities at the higher levels
are aware of the problem, their ability to compel reform at the local
level is uncertain," Mr. Potter notes.
Jerome Cohen, a New York University law professor with
an extensive international arbitration practice, recalls what happened
when he tried to enforce a 1995 arbitral award on behalf of a South Korean
client. Dong Il Trading Co. went looking for justice in the People's Court
in Ningbo, an important commercial city near Shanghai."More than
three years went by without hearing from the Ningbo court," Mr. Cohen
recalls. Finally, after exerting what he calls "an enormous amount
of pressure," including a letter of complaint to the Supreme Court
in Beijing, Mr. Cohen got his response from Ningbo late last year: The
award would not be honored. "We just got the fait accompli, there
was no notice, there was no opportunity for us to look at the evidence
or cross-examine witnesses," Mr. Cohen adds.
Despite many similar horror stories, some experienced
arbitration lawyers see a glass that is -- if not exactly half full yet
-- steadily filling. Hong Kong lawyer Sally Harpole, a former president
of the American Chamber of Commerce in China, says she has seen "significant
progress" by Chinese arbitration authorities in recent years. According
to Ms. Harpole, the China International Economic and Trade Arbitration
Commission hears some 900 arbitrations within China each year. "There
are dozens and dozens of precedents where the Chinese courts have recognized
and enforced a CIETAC arbitration decision," says Ms. Harpole.
But Ms. Harpole and other lawyers say they are unaware
how many international arbitrations in places like Singapore or Stockholm
ever result in a foreign plaintiff collecting money at the order of a
Chinese court. "Several years ago, I was told by Chinese authorities
there had been eight such cases," one lawyer states. CIETEC officials
in Beijing declined written requests to elaborate on the numbers of cases
and outcomes.That's why it's worth watching a new test case that will
soon be entering the Chinese court system.
Six years ago the American company that invented the
airport passenger-boarding bridge some 30 years ago, FMC Corp.'s Jetway
Division, entered into a coproduction agreement with a partner from Shenzhen
named TianDa Airport Support Ltd. TianDa is a subsidiary of CIMC Inc.,
a partially government-owned corporation that is the world's largest producer
of marine shipping containers.FMC brought a generous dowry to the marriage
in the form of high-tech manufacturing expertise. The low-tech TianDa
brought "larceny," determined U.S. District Judge Lynn Hughes
in Houston last year. According to the U.S. court, TianDa stole FMC's
secrets and used them to beat Jetway out of contracts in Beijing and four
other Chinese cities. The Shenzhen company also used that expertise to
win contracts in India and Thailand.
TianDa even went into U.S. markets and won some 20 contracts
by underbidding FMC on its home turf, with the design stolen from the
American company. That's when FMC brought in the hired guns. Washington
lawyers Dan Sullivan and Patrick Coyne first persuaded Judge Hughes in
Houston to impose a restraining order on the Chinese company from marketing
the stolen design in the United States.The FMC lawyers also recently obtained
a similar order from an arbitration panel in Singapore that forbids TianDa
from marketing FMC's industrial secrets anywhere in the world until 2006.
The question now is whether this decision will be enforced in Chinese
courts. In addition, FMC is now asking the Singapore panel to award it
$3.6 million in legal costs, and when that happens the company will also
have to try to collect the money in a Chinese court.
"The vast majority of international arbitrations
result in voluntary compliance from the losing party," notes David
Rivkin, a New York-based international lawyer. "When parties need
to go into a court somewhere in the world to enforce an arbitral award,
they are almost always enforced by a local court." I called TianDa's
Houston counsel, William Lafuze, leaving a message asking if his client
intended to honor the arbitral award and stop marketing FMC's stolen design.
Mr. Lafuze declined to return the call.
For FMC Corp, which has lost tens of millions of dollars
due to TianDa's industrial espionage, the story might not have a happy
ending. A People's Court judge could still dismiss an FMC petition to
enforce the Singapore award against TianDa on grounds it would compromise
the "social and public interest of China." TianDa might get
away with marketing FMC's bridges inside China for another five years
before the arbitral award expires. And come 2006, the Chinese company
will be free to compete against its former American partner anywhere in
the world.FMC officials are keeping a low profile while they pursue their
legal options. A company spokesman says, "It is important to note
that this was a commercial dispute between two companies -- not some form
of indictment against Chinese businesses or the Chinese government."
The Singapore arbitral award, says FMC President Joe
Netherland in a statement, "demonstrates that U.S. businesses can
partner with companies internationally, aggressively pursue international
markets such as China, and still protect contract rights and technology."
The challenge for Chinese authorities -- whether as
a member of the World Trade Organization obliged to honor dispute-resolution
panels directing that it treat all trading partners in a predictable,
non-discriminatory manner, or as a signatory of the New York Convention
-- is to prove patient businessmen like Mr. Netherland correct.
For China, the stakes couldn't be higher. Everyone hopes
China will become a country where the rule of law prevails. This will
only happen when the enforcement of international arbitral awards and
honoring its legal responsibilities as a WTO member become routine --
and no longer newsworthy.
