The comfort of conciliation

It is important for foreign parties involved in disputes in the PRC to understand that from the Chinese point of view a conflict should not be resolved by both sides pursuing their respective interests without regard to the interests of the other side. Chinese parties are inclined to be guided by concepts of fairness, leading to an expectation that strict terms of a contract will not be enforced or that a contract will be renegotiated as a result of a change in circumstances. The commencement of formal arbitral or judicial proceedings to enforce strict rights is often understood as the break of a relationship. By contrast, engaging in mediation is likely to be viewed as an indication of a desire to put the relationship back on track.

Although many foreign parties entering into a contractual relationship with a PRC party will be careful to ensure that they incorporate an agreement to arbitrate in their contract, if it is not possible to include an arbitration agreement or if one has inadvertently not been included, mediation may offer a means to resolving a dispute without needing to resort to litigation through the local courts – something which many foreign parties will be keen to avoid. In some circumstances, and as explained below, a mediated settlement can be converted into an arbitral award, thus allowing it to benefit from the enforceability regime for arbitral awards in the PRC.

Finally, mediation is likely to offer the quickest and most inexpensive way of resolving a dispute with the assistance of a neutral third party and, in most cases, having achieved a fair and acceptable result.

The options
Typically, mediation in the PRC will take one of five forms:

Ad hoc mediation

Ad hoc mediation refers to mediation where the parties have agreed to mediate without submitting the dispute to a formal or institutionalised process. The parties are therefore free to shape the form of the process to suit their precise needs. They may agree their own mediation rules or they may decide to adopt rules, such as the Uncitral (United Nations Arbitration Commission on International Trade Law ) Conciliation Rules (which should not be confused with the Uncitral arbitration rules) or other existing rules.

Foreign-PRC contracts commonly include a requirement for the parties to attempt to resolve any dispute by way of ad hoc mediation before being able to pursue arbitration proceedings. If an agreement is reached, the parties will sign a settlement agreement which is then enforceable as a private contract, or in some cases an arbitral award. This means that if a party does not abide by the settlement agreement, proceedings can be commenced against it for breach of the settlement agreement.

Ad hoc mediation offers the greatest degree of flexibility to parties as compared to other mediation or conciliation processes, allowing time and expense to be saved.

Local institutional mediation

The PRC has established a number of commercial mediation centres under the auspices of the China Council for the Promotion of International Trade (CCPIT), a trade association affiliated to the government. CCPIT established the Beijing Conciliation Centre (BCC), now also known as the China Chamber of International Commerce Conciliation Centre, which in turn has set up conciliation centres in over 40 Chinese cities.

Each centre has its own set of mediation rules, guided primarily on the rules of the BCC. Also, each centre maintains a panel of available mediators or conciliators, who will be local Chinese. Although the centres are local, they are not limited in territorial jurisdiction and will accept any case provided that the parties are in agreement as to their appointment.

This form of mediation will offer parties a greater degree of formality than a pure ad hoc mediation as well as rules of engagement and an administrative body to assist with formalities. The process is consensual and non-binding; by submitting to institutional mediation a party does not waive any rights to walk away from the process.

Joint conciliation

Whereas mediation under the rules of the BCC and similar institutions will be handled by PRC mediators, joint conciliation involves both Chinese and foreign mediators but follows a similar procedure as in local mediation.

Joint conciliation was established in the 1970s and involves conciliation being conducted by a PRC conciliation centre and/or a foreign conciliation centre pursuant to a set of rules adopted by the PRC and a foreign centre. The BCC has concluded a number of co-operative agreements on joint conciliation with foreign centres, including with the Hamburg Conciliation Centre (giving rise to the Beijing-Hamburg Conciliation Rules) and with the US-based CPR Institute of Dispute Resolution, (giving rise to the US-China Business Mediation Centre with its own set of rules, offices in Beijing and New York and a panel of neutral mediators recommended by the two institutions with expertise in a variety of fields and industries).

Under the Beijing-Hamburg Conciliation Rules both parties appoint a mediator; under the rules of the US-China Business Mediation Centre, the parties can agree one mediator or if they prefer, or can not agree, are able to select one China mediator and one America mediator. As with ad hoc mediation, a settlement will be recorded in an agreement which is enforceable as a contract.

Under the rules of the US-China Business Mediation Centre, however, it is possible for the parties to ask the Centre to arrange for the settlement agreement to be entered as an arbitral award, or for it to ask the courts of the relevant and competent jurisdiction to enter the agreement as a court judgment. The ability to enter the settlement agreement as an arbitral award has significant value given the relative ease with which it is possible to enforce arbitral awards in the PRC.

Arb/Med and Med/Arb

One of the unique features of arbitration in China is that proceedings often involve mediation, which will normally take place before the arbitral tribunal. Under Article 51 of the 1994 PRC Arbitration Law, the tribunal is permitted to carry out conciliation during the course of the proceedings if both parties consent. This provision of the PRC's law is replicated in Article 40 of the arbitration rules of the China International Economic and Trade Arbitration Commission (Cietac), the body which administers most international arbitrations in the PRC.

Practically, the process (sometimes referred to as Arb/Med) will involve either the parties asking for mediation to take place during the proceedings, or the tribunal approaching the parties to ask them to consider mediation if the tribunal considers that this will result in a settlement. The mediation takes place before the arbitral tribunal, and if successful, will generally lead to the tribunal issuing an arbitral award reflecting the terms of the settlement. If unsuccessful, the arbitration will continue to a final hearing before the same tribunal.

The process may appear odd to many foreign practitioners and unlikely to succeed given that parties may be unwilling to be entirely open during the mediation if they consider that by revealing sensitive aspects of their case to the tribunal they may prejudice their chances of success in the arbitration if the mediation does not succeed. However, anecdotal evidence suggests that the process is comparatively successful and, for example, Cietac has stated that in 2008, almost one-third of cases referred to it were settled through a combination of arbitration and mediation.

Where parties have entered a contract with an arbitration agreement specifying the Cietac Rules, a slight variation on Arb/Med is Med/Arb where the parties engage in mediation before arbitration proceedings are commenced. This may be ad hoc mediation as outlined above. Under Article 40 of the Cietac Rules, if parties who have reached a settlement agreement through mediation or negotiations are subject to a prior Cietac arbitration agreement, either party may apply to Cietac to constitute a tribunal to cause the settlement agreement to be issued as an arbitral award. As indicated above, this will assist in the enforceability of the settlement.

Mediation and litigation

Finally, mediation can also take place during the course of court proceedings. A People's Court may conduct mediation and where a settlement is reached, the court prepares a written conciliation statement recording the conciliation. The statement is fixed with the court seal and, once served on the parties, it is as legally effective and enforceable as a court judgment. As with arbitration, traditionally the judge(s) who has mediated the case have been able to go on to hear the case if mediation is unsuccessful, but as outlined below, this is likely to change.

The Supreme People's Court Opinion
The recently-published Opinion provides the interpretation of the Supreme People's Court (SPC) of various provisions of PRC laws dealing with mediation, in particular, articles of the PRC Civil Procedure Law (中华人民共和国民事诉讼法). As with previous Opinions issued by the SPC, this judicial interpretation does not strictly form part of the law of the PRC, but its effect is to supplement the law and inferior PRC courts are expected to render decisions consistent with the interpretation.

The Opinion was apparently issued in response to the high number of lawsuits filed in the courts in recent years and its tone makes clear that the Supreme People's Court wants parties to use alternative dispute resolution procedures where appropriate. Article 1 of the Opinion sets out the Court's objectives as:

… establishing a healthy dispute resolution mechanism that harmonises the litigation- and non-litigation-based processes are: to fully make use of the respective strengths of the People's Court, administrative organs, social organisations, public services institutions and other entities, to improve cooperation and coordination between and enhance the full development of various means of dispute resolution, to improve the connection between litigation-based and non-litigation-based processes, to provide the public with more choices of dispute resolution methods, maintain harmony and stability of the society and promote the better and quicker development of the economy and society.

The SPC's pronouncements on the enforceability of settlement agreements will be of most interest to parties who may have to mediate in the PRC. One of the key ways in which the Opinion seeks to encourage the use of mediation is by emphasising enforceability of any agreement reached. The Opinion sets out the following relevant provisions, including methods by which settlements can be enforced:

(a) A settlement agreement containing provisions that deal with the parties' civil rights and obligations shall be the same in nature as a civil contract once signed and sealed by the parties (Articles 9 and 10 of the Opinion).

(b) If an institutionally administered mediation gives rise to a settlement agreement requiring the payment of a sum, the parties can apply to have the agreement notarised in accordance with the of the PRC Notarization Law (中华人民共和国公证法). The effect of this is that if the paying party does not perform, the receiving party can apply to the Courts who will execute the notarised agreement and force payment of the debt forthwith (Article 12).

(c) Where a contractually-binding settlement agreement is reached (even if not administered) requiring payment of a sum, the debtor can apply to the People's Courts for a payment order under the PRC Civil Procedure Law (Article 13).

(d) The parties to an institutionally administered mediation giving rise to a settlement agreement can apply to the People's Court to have the agreement recognised (whether or not there are any provisions as to payment). If the agreement is recognised and subsequently not performed by one of the parties, then the other party can apply to the Court to enforce the agreement as a court judgment. Recognition will only be refused on limited procedural grounds (Articles 20 to 25).

The Opinion also provides guidance on how mediation should be conducted when engaged in during the course of litigation. The new guidance brings mediation more in line with the expectation of foreign parties who may be used to mediation outside the PRC:

(a) The judge(s) who participate(s) in the pre-trial mediation process should in principle not take part in the trial of the same matter, unless agreed by the parties (Article 16).

(b) The court-administered mediation process is not public. The court administration shall not disclose any information regarding the mediation in the litigation process and the parties are not permitted to use or rely on any evidence provided in or written notes made during the mediation process in the litigation, unless agreed or required by the law (Article 19).

Expectations
In the event of a dispute, foreign parties doing business in China will be expected by the PRC counterparty to try to reach some form of negotiated settlement before commencing litigation or arbitration proceedings. For PRC parties, mediation offers a well-established and acceptable way of reaching such a settlement. The SPC's Opinion provides further evidence that the PRC courts will assist parties who reach a mediated settlement to enforce their agreement and this will give comfort to foreign parties that mediation offers an effective way of resolving disputes in China.

Michael Darowski, Lovells, Hong Kong