Taiwan Focus: Resolving cross-strait investment disputes

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Recognition in China and Taiwan

The Chinese have a long-established preference for out-of-court settlement of disputes. Of the various alternatives to civil litigation, or alternative dispute resolution mechanisms (ADR), arbitration is one of the most conventional yet modern means for resolving civil and commercial disputes. The disruption to the world economy in the last decade and the ensuing disputes has underscored the need for a modern and transparent resolution mechanism. Against such background, arbitration has emerged as the preferred means to resolve cross-border business disputes owing to its efficiency, flexibility and party autonomy.

Mediation shares many features with arbitration, like efficiency, cost-effectiveness and confidentiality. Arbitration and mediation proceedings are conducted by professionals with relevant expertise and no government intervention. Both methods seek to neutralise disputes amicably, which is preferred by conflict-averse Asians. The benefits offered by mediation and arbitration make them more ideal options than litigation to defuse cross-border commercial disputes.

PRC recognition of Taiwan arbitral awards

In principle, Chinese courts recognise arbitral awards rendered by Taiwanese arbitration institutions. Of the Chinese laws and rulings governing recognition of Taiwanese arbitral awards, the PRC Law on the Protection of the Investments of Taiwanese Compatriots (中华人民共和国台湾同胞投资保护法) and the Supreme People's Court, Provisions on the Recognition of Relevant Civil Court Judgments of Taiwan by People's Courts (最高人民法院关于人民法院认可台湾地区有关法院民事判决的规定) are the most important. The principle behind these laws is that arbitral awards rendered by arbitration institutions in Taiwan should be recognised unless the reasons for rejection in Article 9 of the Supreme People's Court Ruling are applicable. An award rendered by ad hoc arbitration in Taiwan may not be recognised by PRC courts, because according to Paragraph 2, Article 16 and Article 18 of the PRC Arbitration Law (中华人民共和国仲裁法), an arbitration agreement shall be deemed invalid if the arbitration institution is not specified in the agreement.

Taiwanese recognition of PRC arbitral awards

Under Paragraph 1, Article 74 of the Act Governing Relations between Peoples of the Taiwan Area and the Mainland Area (the Act Governing Cross-Strait People's Relations), to the extent that an irrevocable civil ruling, judgment or arbitral award rendered in China is not contrary to the public order or good morals of Taiwan, an application may be filed with a court for a ruling to recognise the ruling, judgment or arbitral award. Paragraph 2 addresses enforceability, which indicates that where any civil ruling, judgment or arbitral award recognised by a court's ruling demands performance, it may serve as a court order of execution. Paragraph 3 of the same article addresses reciprocity, which indicates that Paragraphs 1 and 2 should not apply until an application may be filed with a court in China for a ruling to recognise the ruling, judgment or arbitral award, or when it may serve as a court order of execution in China.

PRC recognition of mediation settlement agreements

According to a PRC Supreme People's Court ruling issued in 1999, a mediation settlement agreement reached by a Taiwan court shall have the same effect as a Taiwanese civil court judgment. However, a mediation settlement agreement issued or confirmed by a private institution in Taiwan will not be recognised by the People's Courts in China.

Taiwanese recognition of mediation settlement agreements

Article 74 Taiwan's Act Governing Cross-Strait People's Relations, reads: “To the extent that an irrevocable civil decree or judgment, or arbitral award rendered in the mainland area is not contrary to the public order or good morals of Taiwan, an application may be filed with a court for a ruling to recognise it.” The Act does not address recognition of mediation settlement agreements reached by PRC courts. According to a Judicial Yuan Secretary General's interpretation, the civil decree or judgment under Article 74 of the Act Governing Cross-Strait People's Relations should not include civil mediation decisions. Furthermore, a Ministry of Justice interpretation confirmed that civil mediation decisions are outside the purview of Article 74 of the Act Governing Cross-Strait People's Relations.

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Dispute resolution mechanisms

The Cross-Strait Investment Agreement is a bilateral investment agreement (BIA) between China and Taiwan. Among others, it provides various dispute resolution options to resolve P to P and P to G disputes, though it is not common to stipulate resolution mechanisms for P to P disputes in a BIA.

Definition of investment

Investment is broadly defined in the Cross-Strait Investment Agreement, covering real property, personal property, rights derived from contracts, licence rights, guarantees of any kind, debenture bonds and loans, and revenues and expected revenues from investment. Basically, all investment activities would fall under this definition. The Agreement does not apply to public procurement contracts.

Definition of investor

Likewise, an investor is comprehensively defined in the Cross-Strait Investment Agreement, which refers to individuals, enterprises, companies, trusts, outlets, partnerships, and any entities owned or controlled by an investor. Most importantly, Chinese and Taiwanese companies that invest in the other side of the Taiwan Strait through an entity situated in a jurisdiction other than China or Taiwan are also covered under the definition, thus are protected by the Agreement.

P to G dispute resolution

For disputes between a private party and a government agency, the Cross-Strait Investment Agreement prescribes five dispute resolution mechanisms:

• Negotiation: when the government agency has rendered a decision against the private party, the private party may request negotiation with the government agency.
• Coordination: private parties may turn to the agency superior to the government agency in the jurisdiction where the dispute has occurred.
• Conciliation: conciliation is conducted by the investment taskforce designated by the governments of Taiwan and China to resolve an investment dispute. The goal is to have high-level government agencies involved speed up the resolution process. The rule governing government assistance are being drafted at the moment.
• Administrative remedies or judicial proceedings: These are the traditional remedies for dispute settlement. If investors have already filed an administrative appeal or launched litigation, they cannot submit the same dispute for mediation.
• Mediation: Unprecedentedly, the Cross-Strait Investment Agreement stipulates that for disputes over the amount of compensation provided by the government party, the private party can turn to an institution designated by the governments of Taiwan and China for mediation. The two governments are currently discussing the institutions to be designated. In the future, if the investment of an entity of Taiwan or China is expropriated by the government of the other side and the amount of the compensation is in dispute, the entity can request a designated institution to conduct mediation. The Agreement also requires that every six months, the designated institutions report to the Cross-Strait Economic Cooperation Committee on how disputes have been managed. This report mechanism is expected to deter the local governments' intervention in mediation.

As previously stated, the courts of Taiwan and China do not recognise a mediation settlement agreement reached before private institutions of the other side. This disadvantage may discourage parties from choosing mediation to resolve disputes. Nonetheless, since one party to the mediation for resolving P to G disputes under the Cross-Strait Investment Agreement will be the government of Taiwan or China, the risk that the counterparty will breach the mediation settlement agreement is not high.

P to P dispute resolution

Paragraph 1, Article 14 of the Cross-Strait Investment Agreement reads: “The contracting parties may stipulate the methods and commercial dispute settlement methods in accordance with relevant laws and regulations and the principle of party autonomy.” Such provision is an affirmation of people's rights to select dispute resolution mechanisms. Consequently, parties are free to choose mediation or arbitration to resolve their disputes.

Under Paragraph 4, Article 14 of the Agreement, if the parties choose arbitration as the dispute resolution mechanism, they may choose to submit the disputes to an arbitration institution in Taiwan or China and determine the seat of arbitration. Though this provision simply reflects the basic principle of arbitration - party autonomy, it affords the investors in Taiwan and China a fairer and more efficient way to resolve investment disputes with their counterparties.

The plain meaning of Paragraph 4, Article 14 suggests that the parties may designate a Taiwanese arbitration institution such as the Chinese Arbitration Association, whose base is in Taipei, to conduct the arbitration proceeding in Beijing or wherever as agreed to by the parties, including a place other than Taiwan or China. This is an unprecedented arrangement, since previously it was questionable whether an arbitration institution in Taiwan may administer arbitration cases in China.

PRC courts had divergent opinions on whether they should recognise and enforce the arbitration awards administered by foreign arbitration institutions but rendered in China, such as ICC awards rendered in China. Commentators once argued that PRC laws do not allow foreign arbitration institutions to conduct arbitration in China, though one ICC award has been recognised by a PRC court.

In addition, Paragraph 4, Article 14 provides that the parties may determine the seat of arbitration and does not require that the seat must be within China. This is also a breakthrough.

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Increasing confidence

The Cross-Strait Investment Agreement was conceived to offer more options and flexibility in terms of resolution mechanisms for P to P and P to G disputes. Nonetheless, how and whether such options can be enforced remain to be seen. The governments of Taiwan and China need to hammer out the enforcement rules for the agreement to ensure the newly agreed dispute resolution mechanisms function properly. If the agreement is allowed to fulfil its promise, investors on both sides of the Taiwan Strait will be able to act with greater confidence, reap substantial returns on their investments and benefit from a dispute resolution decision that is recognised on the other side of the Taiwan Strait.

Angela Y Lin

Partner

Lee and Li

Angela Y Lin is a partner at Lee and Li, Attorneys-at-Law. Her forte lies in construction litigation, arbitration and mediation, and she is active in local and international arbitration societies. She is registered as an arbitrator of the Chinese Arbitration Association, Taipei (CAA), a mediator at the CAA Mediation Centre and an associate mediator at the Singapore Mediation Center.

Claire C Lin

Associate

Lee and Li

Claire C Lin is an associate at Lee and Li, Attorneys-at-Law, whose practice area includes government procurement contracts, commercial dispute resolution (litigation, arbitration, and mediation), and international trade law (anti-dumping).