CHICAGO-KENT COLLEGE OF LAW
LAW OF NATIONBUILDING
PROFESSOR HENRY H. PERRITT, JR
FINAL SEMINA PAPER:
Commercial Arbitration in
L L.M. CLASS 2007
INTERNATIONAL & COMPARATIVE LAW PROGRAM
This paper would discuss why and how foreign
investors choose arbitration to solve disputes in
To begin with, this paper will descript the three-stage development and current situation of Chinese arbitration.
During the first stage (1949-1979), Chinese government set up the Foreign Trade Arbitration Commission (known as China International Economic and Trade Arbitration Commission at present, abbreviated as “CIETAC” hereafter) and China Maritime Arbitration Commission (abbreviated as “CMAC” hereafter) to facilitate the resolution of international business disputes. These two commissions are both non-governmental and accepted international customary rules as their fundamental principles. There are no domestic arbitrations during this stage.
the second stage (1979-1995),
the third stage (1995-present),
Certainly, the author does not suggest that arbitration could
solve all disputes in the short term. However, it is advisable that arbitration
is the best way to solve disputes for foreign investors in
This article will also describe arbitration procedures and
TABLE OF CONTENTS
6.2.6 Non-enforcement circumstance………………………………………………………………… …. 26
International Commercial Arbitration
As a Foreign Investor Dispute Resolution Procedure
With the interactive development of international legal systems, differences between civil law and common law are continually blurred, while legislation mainstream of a specific country might still be restricted by the corresponding legal doctrines.
But arbitration law is the least different between civil law and common law.
The reason why arbitration law has been least influenced is that arbitration law arise from common law countries. Arbitration Law of England and Arbitration Rules of International Trade Law Committee of United Nations, which are most typical, have provided valuable reference for other countries.
Acting as an effective way to resolve disputes arising in the field of civil law and commercial law, arbitration has long been preferred by the majority of corporations and businessmen.
According to reported statistics, eighty percent of total economical disputes of World Top 500 companies have been settled by arbitration institutions annually.
Up to present, arbitration is the only
dispute resolution measure that has been accepted far and wide internationally.
The globalization of economic activity and
I n China about 10-15 years ago the Chinese way of negotiating a investment or a joint venture agreement was to say, I don’t care how to settle a dispute for we have good relationship.
Today, however even Chinese would make more formal dispute settlement procedure, because foreign investors do not trust the old way.
So, if the foreign investor wanted to invest
Arbitration Law of People’s Republic of China
(Arbitration Law 1995), approved on
Because, economic development phase is
different, arbitration legal system of
After the establishment of People’s Republic
• Foreign Trade Arbitration Commission was set up in 1954 which was mainly responsible for foreign related arbitration cases.
• Maritime Arbitration Commission was set up in 1959 which primarily involved with maritime related arbitration cases.
Corresponding, several fundamental principles were made for these two arbitration commission.
Generally speaking, foreign related
arbitration legal system of
While domestic arbitration system was less
developed, due to the restriction of
Thanks to carry out transforming and
There were also great changes in people’s mind toward economic activities.
To meet the demand of economic development, domestic arbitration system was gradually resumed and expanded, most importantly, commercial contract arbitration system, technical contract arbitration system, real estate dispute arbitration system and so forth.
However, original domestic arbitration systems increasingly (show the shortcoming) fell behind of the development of socialism market economy.
Firstly, since domestic arbitration commissions •were subject to administrative agencies, there was frequently intervention from administrative power; •several cases were required to be accepted and heard by arbitration commissions (compulsory arbitration); •without arbitration agreement between parties in dispute, and •some arbitrators also took the responsibility of administrator.
Which dramatically reduced the efficiency of arbitration and contradicted to international customary rules of nongovernmental arbitration.
Especially, “Once Arbitration & Twice Litigation” exist side by side. Under this system that Arbitration no meaning, only waste time and money!
In general, If one
party know that they will lost the case, the party do noting only waiting the
award and then bring a litigation. Every thing beginning from the zero.
Because, Chinese court system adopt twice litigation system. The meaning
is each case only should be given twice judgments by two different level courts. If one party lost, the lost
party can appeal to the higher level court, and the” appeal court” made the
decision is the final decision. Generally, “Four level Twice Litigation ”
system is very famous in
level, means there have four different
level courts in
Secondly, the existence of all kinds of (commercial contract, technical contract, real estate) arbitration institutions, every level government has their own arbitration institutions ,overlapping jurisdiction and segmented administration, and the inconformity of activities between arbitrations violated the inherent doctrines of arbitration itself and impeded the smooth process of arbitration.
Thirdly, domestic arbitration apply different law with foreign arbitration. There are already existing arbitration regulations, which could be researched in fourteen statutes, eighty-two regulations and one hundred and ninety provincial rules, obviously lacked unification.
While during the same period, foreign related arbitration system experienced a high speed development. Foreign Trade Arbitration Commission and Maritime Arbitration Commission conduct their responsibilities by following international customaries and were increasingly welcomed.
By this phase, domestic and foreign arbitration out of balance.
Foreign arbitration more and more popular under the international customaries and rule; domestic arbitration by the bide their own confused rules day and day unpopular.
Arbitration Law 1995 dramatically transformed the domestic arbitration system on the ground of accumulated practical experience and reference to international customaries, mainly including the following innovations:
• Abolishing compulsory arbitration regulations, and applying the principle of voluntary arbitration & arbitration agreement based on the inherent nature of arbitration;
• Abolishing affiliation relationship between arbitration commissions and governmental agencies, and reestablished arbitration commission which is independent from governmental agencies and free of administrative intervention;
• Abolishing segmented jurisdiction which implies arbitration commission would be selected by the agreement between parties in dispute, and level jurisdiction & regional jurisdiction are inapplicable within the domain of arbitration;
• Abolishing the dispute resolution measure of Once Arbitration & Twice Litigation which is both arbitration and litigation, applying the principle of Either Arbitration or Litigation and One Final Arbitration.
• According to Arbitration Law 1995, commercial contract arbitration commissions, technical contract arbitration commissions, real estate arbitration commissions at all levels, originally affiliated to governmental agencies, should be terminated all and singular within one year after the execution of Arbitration Law 1995, and would be replaced by the newly-established arbitration commissions organized by provincial governments, municipality governments directly under the Central Government, autonomous region governments and city governments with districts later.
• Arbitration Law 1995 composed by eight chapters and eighty articles, provides fundamental principles of arbitration, establishment of arbitration commission and association, arbitration agreement, arbitration procedure, repeal and performance of arbitration , special rules applying to foreign related arbitration and other supplementary articles.
• Furthermore, Arbitration Law 1995 provides organization of arbitration commissions, case acceptance scope, registration rules and charging rules, also lays formal templates of articles of associations and provisional arbitration rules for domestic arbitration commissions.
What’s more, the Supreme Court of China has also issued several judicial explanations successively, which aim to regulate the reestablishment of arbitration commissions from judicial point of view.
In a nutshell, although there is still room for improvement, some of the fundamental principles and concrete practice of Arbitration Law 1995 are basically close to international customaries, and some already in line with international standards.
Arbitration Rules 2005 of CIETAC are paving the way for conforming with international customaries to the greatest extent.
"Full autonomy" is respected as the core of arbitration. Arbitration grants the parties complete autonomy in selection of the arbitration institute, [well, not really; youir footnote to the arbitration agreement says that, unless the agreement involves CIETAC, it is invalid????] arbitrators, arbitration venue, arbitration language, arbitration rules and the applicable law, etc.
Up to now, there are more than 160 arbitration
The number of cases accepted by CIETAC has been ranked top one among arbitration institutions world wide since 1992. 
Disputes shall be fairly and reasonably settled by arbitration on the basis of facts and in accordance with the relevant provision of law.
No any other proceedings including appeal or retrial shall be applied once the arbitral award is rendered. The date on which the arbitral award is made is the date on which the arbitral award comes into legal effect. Arbitration provides a flexible method, which can give a simple, quick, efficient and final solution to a dispute.
The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards("the New York Convention")lays down a convenient and generally accepted framework for the recognition and the enforcement of international arbitral awards. Under the Convention, the arbitral awards made in any signatory countries can be recognized and enforced through the competent courts of 135 countries and regions.
The arbitration case shall not be heard in open session. Without the consent of the claimant and the respondent, no third party can attend arbitration hearing and no information relating to the case can be disclosed to the mass press. The principle of confidentiality is highly respected by the arbitral tribunal and the arbitration commission.
An arbitration agreement means an arbitration clause stipulated by the parties in their contract or a written agreement concluded by the parties to submit their dispute for arbitration. The arbitration agreement may be reached prior to or after the occurrence of disputes.
CIETAC takes cognizance of a case in accordance with an arbitration agreement reached by the parties to refer their dispute to CIETAC for arbitration and upon the written application by one of the parties.
A valid arbitration agreement must contain the following 3 elements according to the Arbitration Law of P.R.C.
(1)The intention to submit the dispute for arbitration;
(2) The matters for arbitration;
(3) The arbitration institute.
The single ruling system shall be applied in arbitration. The arbitration commission shall not accept any application for arbitration, nor shall a people’s court accept any action submitted by the party in respect of the same dispute after an arbitration award has already been given in relation to that matter.
Procedure of Applying for Arbitration:
(1). Submit an arbitration agreement;
(2). Submit the Application for Arbitration;
(3) Submit the facts and evidence on which the claim is based;
(4) Prepay the Arbitration Fee.
After the claimant has completed the above-mentioned requirements, the Notice of Arbitration will be send to the parties by CIETAC-Beijing/Shanghai/Shenzhen immediately, which means the Arbitration procedure begins thereupon. The claimant may also request to amend his arbitration claim during a reasonable time thereafter.
When applying for arbitration, the parties shall pay certain fees in advance, which include:
5.2.1 The arbitration fee
The arbitration fee shall be paid in advance by the claimant when applying for arbitration or by the respondent when lodging his counterclaim. The collection of the arbitration fee shall be based on the Arbitration Fee Schedule in CIETAC Arbitration Rules. The arbitration tribunal shall decide in the arbitral award which party should bear the arbitration fee and how much each party should bear.
5.2.2 The actual costs
The actual costs include those for making
investigations and collecting evidence, costs for engaging expert to make
appraisal and expenses necessary for the arbitrators from places other than
The arbitration fee for those domestic cases is lower than those foreign-related cases .
5.3.1 Defense and counterclaim
The secretariat of CIETAC- Beijing,
The counterclaim must meet the following three requirements:
(a)Arising from the same contract relation or legal relation as that of the claims raised by the claimant;
(b)The counterclaim is directed against the claimant;
(c)The disputes involved in the counterclaim shall not be the same as the disputes involved in the arbitration claims.
The respondent may request to amend his defense and/or counterclaim.
5.3.2 Composition of the Tribunal
Sole-arbitrator tribunal is composed of one arbitrator and collegiate tribunal with three arbitrators, The parties may agree upon the ways to form the tribunal. Pursuant to the Arbitration Rules, Summary Procedure shall, unless otherwise agreed by the parties, automatically be applied to any case in dispute where the amount of claim totals not more than RMB 500,000 Yuan. Summary Procedure may also be applied to any case in dispute where the amount of claim totals more than RMB 500,000 Yuan provided that both parties agree in writing. The cases which the Summary Procedure applied to shall be examined and heard by a sole-arbitrator tribunal.
Generally, oral hearings are conducted in the course of arbitration. However, the arbitration tribunal may examine the case and make an award on the basis of documents only with the consent of the parties, or in case of Summary Procedure. The arbitration tribunal shall not hear cases in open session. If both parties request a hearing to be held in open session, the arbitration tribunal has the power to decide to do it or not. All participants shall not disclose my substantial or procedural matters to outsiders when the case is not heard in open session.
The parties shall send their representative(s) or authorized agent(s) to attend the hearing. Should one of the parties fail to appear at the hearing, the arbitration tribunal may proceed with the hearing and make an award by default.
In the process of arbitration, the parties may reach an amicable settlement agreement by themselves, or they may either request, or after consulted by the tribunal, agree that the arbitration tribunal to conciliate the case. If the conciliation is successful, the arbitration tribunal shall make an award in accordance with the consents of the parties' settlement agreement. Should conciliation fail, any statement, opinion, view or proposal which has been made, raised , put forward, acknowledged, accepted or rejected by either party or by the arbitration tribunal in the process of conciliation shall not be invoked as grounds for any claim, defense and counterclaim in the subsequent arbitration proceedings, judicial proceedings, or any other proceedings.
The arbitral award shall be decided by the majority of the tribunal. When the arbitration tribunal cannot attain a majority opinion, the arbitral award shall be decided in accordance with the presiding arbitrator's opinion. The date on which the arbitral award is made is the date on which the arbitral award comes into legal effect. The arbitral award is final and binding upon both parties. Neither party may bring a suit before a law court or make a request to any other organization for revising the arbitral award.
There are limited defenses to the enforcement of an arbitration award. A losing party may attempt to vacate the award in courts of the country where it was made. Alternatively, it may wait until the prevailing party seeks enforce . The New York Convention Article V  lists seven grounds on which recognition and enforcement of an award may be refused, such as an invalid arbitration agreement, lack of due process, an improperly constituted tribunal, a not yet binding award or an award in excess of jurisdiction. An enforcing court may also reject an award deemed to offend that country’s public policy. Significantly, the New York Convention list does not include disagreement with the merits of the arbitrators’ award as a ground to refuse enforcement.
Although the seven grounds for refusing to enforce a foreign arbitral award under the Convention are regarded as exclusive, parties have continued to explore additional avenues of avoidance.
In recent years,
The winning party in an international
commercial arbitration would like to enforce its award in the
For many years, courts in the
A court may refuse to recognize and enforce a foreign arbitral award based on the seven grounds set forth in Article V of the New York Convention.
In keeping with the New York Convention’s ‘’pro- enforcement’’ bias,
A party challenging an award bears the burden of proving that the award should not be enforced. Moreover, the seven enumerated grounds have been held to be the exclusive grounds upon which a party can oppose enforcement of an arbitral award under the Convention.
Consist with these rulings, the Federal
Arbitration Act (“FAA”) implementing legislation provides that a
The Convention, however, permits courts to
apply their own procedural law, which has opened the door to further grounds
for opposing the enforcement of foreign arbitral awards. For example,
An award shall be legally effective on the date it is given. The parties shall automatically execute the arbitral award within the time limit specified in the arbitral award. In case one party fails to execute the arbitral award, the other party may apply to the competent people’s court for enforcement in accordance with the relevant provisions of the Civil Procedure Law of P.R.C., and the court shall enforce the award.
In accordance with the Civil Procedure Law and Arbitration Law of P.R.C, arbitral awards can be classified to three categories: domestic arbitral awards, foreign-related arbitral award, and foreign arbitral awards. For the three different categories, different legal stipulations and different conditions for enforcement are applied.
As for the domestic arbitral awards, Chinese courts can examine both form the substantive perspective and form the procedure perspective; as for the foreign-related arbitral awards, Chinese courts can examine only form the procedure perspective, and not form the substantive perspective; as for the foreign arbitral awards, New York Convention which begins to bind China form 1987 is fallowed.
(1) Foreign arbitral award—apply to the intermediate People’s court;
(2) Domestic arbitral award—apply to the local district People’s court;
3. Property Preservation—before file a lawsuit
4．Preliminary execution—before litigation
6．“Report in advance” system to Revoke a Foreign Arbitral Award.
（1）Foreign arbitral award—apply to the intermediate People’s court.
If the residence or the properties of the losing party is located
If any party has applied for the adoption of
property preservation measures, the foreign affairs arbitration agency of the
People's Republic of
If one party fails to comply with the award
made by the foreign affairs arbitration agency of the People's Republic of
（2）Domestic arbitral award—apply to the local district People’s court.
If the residence or the properties of the losing
party is located within the
(1)If the residence of the losing party or the property of the losing party is located outside China, and the country in which the residence or the property of the losing party is located has already acceded to the New York Convention, the other party may apply to the competent court in that country for enforcement in accordance with the New York Convention.
(2)If a party applies for execution of a legally effective judgment or order made by a people's court and the party subject to execution or its property is not within the territory of the People's Republic of China, it may directly apply for recognition and enforcement to the foreign court which has jurisdiction over the case, or the people's court may, in accordance with the relevant provisions of the international treaties concluded or acceded to by China, or on the principle of reciprocity, request recognition and enforcement by a foreign court.
(3)If a party applies for execution of a legally effective arbitration award made by a foreign affairs arbitration agency of the People's Republic of China and the party subject to execution or its property is not within the territory of the People's Republic of China, it may directly apply for recognition and enforcement to the foreign court which has jurisdiction over the case. 
(4)If an award made by a foreign arbitration
agency requires the recognition and enforcement by a people's court of the
People's Republic of
(1)Any interested party whose lawful rights and interests, due to urgent circumstances, would suffer unremediable harms without immediately applying for property preservation, may, before filing the lawsuit, apply to the people's court for the adoption of property preservation measures. The applicant shall provide a surety; if the applicant fails to do so, his application shall be rejected.
After receiving a party's application, the people's court must make an order within 48 hours concerning property preservation; if property preservation is granted by an order, the implementation thereof shall begin immediately. If the applicant fails to bring an action within 15 days after the people's court has adopted the preservation measures, the people's court shall cancel the property preservation.
After a people's court has ordered to grant property preservation before litigation, the applicant shall bring a lawsuit within 30 days. If he fails to bring a lawsuit within the time limit, the people's court shall cancel the property preservation. 
(2)Property preservation shall be limited to the scope of the claim or to the property relevant to the case.
Property preservation shall be carried out by sealing up, distraining, freezing or other methods as prescribed by law.
should the people's court freeze a property, it shall notify the person against whom the application is made.
Property that has already been sealed up or freezed shall not be sealed up or freezed again. 
(3)If the applicant against whom the application is made provides a surety, the people's court shall cancel the property preservation.
(4)If an application is wrongfully made, the applicant shall compensate the person against whom the application is made for any loss incurred from property preservation.
(5) If a property preserved by a people's court needs to be kept under surveillance, it shall notify the unit concerned to be responsible for the surveillance, and the person against whom the application is made shall bear the expenses thus incurred.
(1)The people's court may, at the request of the parties concerned, order preliminary execution in respect to the following cases:
(a) those involving claims for alimony, support for children or elders, pension for the disabled or the family of a decedent, or expenses for medical care;
(b) those involving claims for remuneration for labor; and
(c) those involving urgent circumstances that require preliminary execution.
(2)Cases in which preliminary execution is ordered by the people's court shall meet the following conditions:
(a) the relationship of rights and obligations between the parties is definite, and denial of preliminary execution would seriously affect the life or business of the applicant; and
(b) the person against whom the application is made is capable of fulfilling the obligations involved in the preliminary execution.
(3)The people's court may instruct the applicant to provide a surety; if the applicant fails to do so, his application shall be rejected. If the applicant loses the lawsuit, he shall compensate the person against whom the application is made for any loss of property incurred from the preliminary execution.
(4)If a party is not satisfied with the order on property preservation or preliminary execution, it may apply for reconsideration which could be granted only one. Implementation of the order shall not be suspended during the time of reconsideration.
6.2.6 Non-enforcement circumstance 
If the person against whom the application is
made provides evidence which proves that the arbitration award made by the
foreign affairs arbitration agency of the People's Republic of
(1) the parties have not stipulated clauses on arbitration in the contract or have not subsequently reached a written agreement on arbitration;
(2) the person against whom the application is made is not duly notified to appoint the arbitrator or to proceed with the arbitration, or the said person fails to state its opinions due to reasons for which he is not held responsible;
(3) the composition of the arbitration division or the procedure for arbitration is not in conformity with rules of arbitration; or
(4) matters decided exceed the scope of the arbitration agreement or the limits of authority of the arbitration agency.
If the people's court determines that the execution of the award at issue is against the social and public interest, it shall order to disallow the execution of the arbitration award.
Supreme Court of China enacted <Notify of
Related Matter about how to handle the Foreign Arbitration of Revoke an
Arbitral Award> in
In this document set up “Report in advance” system for Revoke an Award.
The main content following:
(1)If one losing party apply to cancel an award, and the competent court want to support the losing party, should submit a view of investigation to the higher level court(high court) in 30 days since that accepted the case. And
(2)If the high court still agree to cancel the award, should submit an opinion of examination to the Supreme Court of China in 15 days since that received the report from lower court (intermediate court).
(3)The cancel decision shouldn’t made before they get the replay of support from Supreme Court of China.
That is to say, any cases about revoke of foreign arbitration award decided by the Supreme Court of China.
In fact, there is special system “3 level 3 litigation” for deal with the revoke of foreign arbitration award. Compare with the common system of “4 level 2 litigation “(see page 10),revoke a foreign arbitration award is really careful…
The goal not only very careful of the revoke of a foreign arbitral award but also defend the effective of foreign arbitration award.
If the execution of an arbitration award is disallowed, the parties may, in accordance with the written agreement on arbitration concluded between them, apply to the arbitration agency for arbitration anew, or may file a lawsuit in a people's court.
Arbitration can be faster than litigation; arbitration can be cheaper than litigation; arbitration is less formal; arbitration tend to be more sophisticated and knowledgeable than juries.
If you get a bad decision form the arbitrator, there usually is nothing you can do about it (no appeals as are allowed in litigation);
You may get stuck with a bad arbitrator;
You have less chance to really investigate your case(through discovery, which is typically broader in litigation)
1. No appeal
2. Limited discovery
3. Difficult to bring in third parties
• Litigation: 1-2year
• Cost :prepay, Once or twice times
Arbitrator: an arbitrator shall meet one of the following requirements:
• At least 8 years of work experience in arbitration;
• At least 8 years of work experience as a lawyer;
• At least 8 years of work experience as a judge;
• Engaging in law research and teaching, with a senior academic title.
• (1) to be a citizen of the People's Republic of China;
• (2) to have reached the age of 23;
• (3) to endorse the Constitution of the People's Republic of China;
• (4) to have fine political and professional quality and to be good in conduct;
• (5) to be in good health; and
• (6) to have worked for at least two years in the case of graduates from law specialties of colleges
• (7)or universities or from non-law specialties of colleges or universities but possessing the professional knowledge of law; or to have worked for at least one year in the case of Bachelors of Law; those who have Master's Degree of Law or Doctor's Degree of Law may be not subject to the abovementioned requirements for the number of years set for work.
• (8)Persons to be appointed judges or assistant judges for the first time shall be selected through public examination and strict appraisal, from among the best qualified for the post, and in accordance with the standards of having both ability and political integrity.
In here, I would discuss a case represented by
myself during 2002-2005, known as “the No
Seemingly, someone might fell confused to see such a case involving litigation in this paper concerning to arbitration. While, based on my own experience in this case, I want to illustrate that arbitration could act as an effective measure to solve disputes in such a country that there is still on the way to rule of law.
That is to say, if we can not settle down a case under the law of one country which country lack of a kind of legal system what we need; if we have the chance to choose an international commercial arbitration, further more to choose another country’s law which country has a kind of law that we need or the country’s legal system is desirable to solve the dispute and then we could avoiding all kinds of obstacles when selecting litigation to deal with the dispute. why we could not to do so? If we have an opportunity to choose, why we still can not give up the idea- take an egg to crash a stone?
This case is a nationally test case from the points of views of its subject matter and quality. However, at the beginning the high court didn’t know how to deal with this case. Because any provision of the current law can’t expressly regulate the derivative litigation by the shareholders.
In the development of the stock market in
Red Stone Company is an real
estate company, the company was established with 6 shareholders (5 shareholders
ABCDE are natural persons, F is another real estate state company) in
1995. Among the 5 shareholders, ABCDE
holding 95% of shares of the company, are the shareholders and directors of the
company; D was the legal representative and the board chairman of the company,
he didn’t convene the meeting of the board of directors on the important issues
or the shareholders’ meeting to make decisions, and didn’t report the status on
work and provide relevant documents. ABC learned little about the operational
and financial situations of the company. E know little too, even though he
still working for D, he support ABC only behind D’s
back; F still keep silence. Both of them know the company holding 100% shares
of two famous and high value real estate projects (CBD project1 and CBD
project2) which located in famous CBD (Central Business District )of
But, at the end of 2002, ABC(A is an American Chinese) even didn’t know the basic situations of the company, such as where is the office of the company? Who is the financial staff member? Where are the financial files? They know their own company only from newspapers and TV report, so, all of them together authorized attorney to help them, because they couldn’t find the true profits of the company.
They visit us in our Law Firm, We signed trust agreement with them, got trust deed and carry out investigation and collected the evidence of the Red Stone Company to the Industry of Commerce Administration Bureau and relevant organizations and personal, and then we found that the senior executive were controlled by D, the majority shareholders, and had illegally transferred the two project of the company to the other two companies(Co.1, Co.2) which set up by D and his wife independently ,and no pay. Red Stone Co. only left 10% and 5% in CBD project1 and CBD project2 after the two transferred shares.
These behaviors of D and his wife had infringed the interests of the company. especially, dilution of the minority shareholders’ s shares, except D, ABCEF had got huge harm by D and his wife’s behaviors. According to the theory of derivative action in the case: D and his wife would receive the benefit , ABCEF suffered the harm.
In this situation, we told ABC resolved the problem there were two scenarios :
Direct action and Derivative action.
Firstly, take the litigation between natural persons. directly sue D, that is direct action. The litigation between the shareholders, maybe the people will think that is a big argue between the rich person, no body will pay attention ,
Secondly, they should be through derivative litigation by shareholders.
Because all behaviors of D depended on his positions in company that the Characteristic belong to derivative action by shareholders.
However, we couldn’t find legal support from the company law
to sue in the court, and there was no similar case in
(1) This is a justice fight to A,B,C; minority shareholders only want to protect their lawful right. D is on the side of unjust;
is famous person in
(3) The case about popular area which real estate area;
(4) The case touch huge money which about 2 billions dollars;
(5) Social problem--- no rules about derivative action by shareholders; no way to protect minority shareholder’s right.
document: February 2004, we found a legal document: “guiding suggestions for
several issues in the trail of company dispute
(test) announced by the high court of
Which one can get better result?
Both of us, ABC and attorney decided to face the challenging case that is take the derivative litigation.
Before we take a suit in court, we give a letter of lawyer to D, and asked D to inform the status on the company operation in writing, and apologize for his having infringed the property of company, and compensate for the harm of the minority shareholders.
Without satisfactory answer, we take the derivative litigation in the High People’s Court of Beijing.
1. litigation purpose: plaintiff claim their individual damage due to the financial damage of 1.05billions Yuan RMB(about 13 millions dollars). The number just arrived the line of accepted standard of the High People’s Court of Beijing, only for avoid the burden of the huge litigation fee)
2. D bear the litigation fee;
3. The two companies (Co.1, Co.2) which were set up by D and his wife shall be take the liable for the damage in the transfer of the 2 projects shares from the company.
In 9June 2004, after attorney submitted the complaint 2 months, in August 2, the court formally started the proceeding of the dispute in infringed the company’s interests. Generally, the court accepted a case only in one week will tell the plaintiff accepted or refuse, but this case let us waiting almost 2 months, that is to say, the court deal with this case very carefully.
Before this case , it seldom happened that some shareholders sues other shareholders due to the damage on companies in China, even the few ones have almost been refused by the court， the reason is without a law (no rule can’t make decision). Now the High People’s Court of Beijing has announced such guidelines, the litigation process was uncertain with little prediction.
By this time, D urgent asked us for negotiation. Before one week of the day of open the court session/hold a court, 26May 2005, the plaintiff and defendant reached an understanding and signed the agreement of compromise, and the most important the plaintiff get the compensate.
In May26, the day of hold a court, plaintiff withdraw their claims, the court confirmed the withdraw claim in June13, 2005. The case was over.
The case resulted in an agreement by parties through the voluntary reconciliation. The conclusion of the case has obviated some inextricable issue in the practical reality.
After this case, at the end of May 2005, CaoShouYe the
director of Research Office of the Supreme People’s Court commented:
“If any resolution adopted by a shareholder’s general meeting interests of
board of directors violates any law or regulations, or infringes the legitimate
interests of shareholders in the people’s court to ask of the injunction for
the action in infringement or in violation of law in company law, can not be
regarded as the derivative litigation by shareholders. this provision is seldom
applied in the practical reality. there is no derivative
litigation by shareholders in
Taught by the case, we thought that the current laws are too abstract to by applied, the damage that we claimed will certainly be refused without the guidance announced by the High People’s Court of Beijing.
We have won for our clients a satisfactory result better than they had expected in so challenging a case. But we know we only settle down this case, a lot of problem about derivative litigation by shareholders we can do nothing.
Of course, during deal with this case, we meet a lot of hard questions, even we(lawyers) have been directly taken a legislate suggestion to the National People’s Congress of China(N.P.C) that is “set up derivative action system in China as quickly as we can to preserve the steady of sequence of society”. Latter, we took the legislate suggestion through deputy of the N.P.C. We got answer in words that is the country need to do it, but we do things should be abide by the legislative procedure”. D urgently wanted to solve the dispute between us when he got the news.
We deal with this case, all the theories come from
1. Derivative Actions by Shareholders:
In the typical shareholders' derivative action, disgruntled shareholders demand that the corporation take action against directors, officers, or others for wrongdoing that has harmed the corporation. When the corporation refuses, the shareholders bring a derivative action against the alleged wrongdoers and join the corporation as a defendant. Invariably, the corporation is eventually recast as a plaintiff, because the action is brought to benefit the corporation.
Derivative actions are becoming increasingly common and growing more risky. Generally, they are brought by an existing shareholder on behalf of the company against the officers and directors of the company and they allege breach of fiduciary duty. Derivative actions come in two basic varieties: those that accompany class actions and those that are free-standing. These two types require very different approaches.
Rules 23.1 of Federal Rules of Civil Procedure of U.S:
In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege (1) that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiff’s share or membership thereafter devolved on the plaintiff by operation of law, and (2) that the action is not a collusive one to confer jurisdiction on a court of the United States which it would not otherwise have. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the plaintiff’s failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs.
2. New York Business Corporation Law 
Section623: Procedure to enforce shareholder’s right to receive payment for shares.
Section626: Shareholders’ derivative action brought in the right of the corporation to procure a judgment in its favor.
(a) An action may be brought in the right of a domestic or foreign corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.
(b) In any such action, it shall be made to appear that the plaintiff is such a holder at the time of bringing the action and that he was such a holder at the time of the transaction of which he complains, or that his shares or his interest therein devolved upon him by operation of law..
(c) In any such action, the compliant shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort.
(d) Such action shall not be discontinued, compromised or settled, without the approval of the court having jurisdiction of the action. If the court shall determine that the interests of the shareholders or any class or classes thereof will be substantially affected by such discontinuance, compromise, or settlement, the court, in its discretion, may direct that notice, by publication or otherwise, shall be given to the shareholders or class or classes thereof whose interest it determines will be so affected; if notice is so directed to be given, the court may determine which one or more of the parties to the action shall bear the expense of giving the same, in such amount as the court shall determine and find to be reasonable in the circumstances. And the amount of such expense shall be awarded as special costs of the action and recoverable in the same manner as statutory taxable costs.
(e) If the action on behalf of the corporation was successful, in whole or in part, or if anything was received by the plaintiffs or plaintiffs or a claimant or claimants as the result of a judgment, compromise or settlement of an action or claim, the court may award the plaintiff or plaintiffs, claimant or claimants, reasonable expenses, including reasonable attorney’s fees, and shall direct him or them to account to the corporation for the remainder of the proceeds so received by him or them. This paragraph shall not apply to any judgment rendered for the benefit of injured shareholders only and limited to a recovery of the loss or damage sustained by them.
Section627: Security for expenses in shareholders’ derivative action brought in the right of the corporation to procure a judgment in its favor.
Section628: Liability of subscribers and shareholders.
(a) A holder of or subscriber for shares of a corporation shall be under no obligation to the corporation to the payment for such shares other than the obligation to pay the unpaid portion of his subscription which in no event shall be less than the amount of the consideration for which such shares could be issued lawfully.
(b) Any person becoming an assignee or transferee of shares or of a subscription for shares in good faith and without knowledge or notice that the full consideration therefore has not been paid shall not be personally liable foe any unpaid portion of such consideration, but the transferor shall remain liable therefore.
(c) No person holding shares in any corporation as collateral security shall be personally liable as a shareholder but the person pledging such shares shall be considered the holder thereof and shall be so liable. No executor, administrator, guardian, trustee or other fiduciary shall be liable.
Section629: Certain transfers or assignment by shareholders or subscribers; Effect
Any transfer or assignment by a shareholder of his shares, or by a subscriber for shares of his interest in the corporation, shall not relieve him of any liability as a shareholder or subscriber if at the time of such transfer or assignment the aggregate of the corporation’s property, exclusive of any property which it may have conveyed, transferred, concealed, removed, or permitted to be concealed or removed, with intent to defraud, hinder or delay its creditors, is not at a fair valuation sufficient in amount to pay its debts, or if such condition is imminent.
All of above tell us that the legal system of derivative action of American is desirable, minority shareholders’ rights can get protected, and the duty of directors or comparable authorities prevents them from damaging of the interest of the company or the shareholders.
According to the Article 17 of the
International Chamber of Commerce Rule of Arbitration (ICC),
that the parties are free to choose the rules of law to arbitration.
In my case, If the minority shareholders before signed the
articles of association of the company (the company rules) which can choice
international arbitration or choice applicable
If we can avoid all
kinds of obstacles to choose arbitration
to settle down a dispute, why
not? At same time, in some degree I believe it will promote the legal system as
quickly as the legislative organization set up proper legal system in
From now, let us pay attention to the international commercial arbitration, making more and more people know that it is to choose an international commercial arbitration is an effective way to resolve disputes arising in the field of civil law and commercial law.
The most important that is drafting an arbitration agreement. The following model clause may be used by the parties for submitting a dispute for arbitration, including disputes about corporate governance.
1. Any dispute arising from or in connection with this Contract, including but not limited to disputes over corporate governance, shall be submitted to the China International Economic and Trade Arbitration Commission (CIETAC).
2. Arbitration shall be conducted under the Commission's arbitration rules. The arbitral award is final and binding upon both parties.
3. The parties shall proceed with the arbitration in bona fide co-operation.
4. Language of Arbitration: Chinese language and English language Each party shall pay its own translators and interpreters.
5. Choice of Law: Chinese law.
6. Venue of Arbitration:
7. Selection of Arbitrators: The parties shall appoint arbitrators from the Arbitration Commission’s roster.
8. Number of Arbitrators: The arbitral tribunal shall be composed of three arbitrators. Each party may select one arbitrator. If the parties cannot agree on the selection, of a third person from the roster as the chief arbitrator then the chairman of the CIETAC will appoint the chief arbitrator.
9. Arbitration Procedure: The parties can application of the General Procedure.[I don’t understand this; the footnote refers to the “Summary Procedure;” are there two different procedures? If so, which one is to be used?
10. Rule of Evidence: Each party have the burden of proving the facts relied on to support their own claim, defense or counterclaim. If a party having the burden of proof fails to produce evidence within limited time, or if the evidence offered is not sufficient to support their claim or counterclaim, the claim shall be decided against that party.
11. Conciliation: After the submission of an arbitration application, the parties may settle the dispute among themselves through conciliation. If a conciliation agreement has been reached, the parties may apply to CIETAC for an award based on the conciliation agreement. They may also withdraw the claim.
12. Effective term: Effective as from the day of the agreement was signed by the parties.
13. This agreement shall exist independently. Any, rescission, termination or invalidity of the contract shall not affect the validity of this arbitration agreement.
14. This agreement shall remain effective and enforceable against the legal representatives of either party in case of that party’s death.
By: (party’s name, address)  By: (party’s name, address)
International Commercial Arbitration in
Even though, the developing of
So, as a foreign investor deal with an
 The Report of the Working of the CIETAC in 2004.
 China International Economic and Trade Arbitration Commission (CIETAC), formerly called the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade (1956-1980) and the Foreign Economic and Trade Arbitration Commission of the China Council for the Promotion of International Trade (1981-1988).
 China Maritime Arbitration Commission(CMAC), formerly called the Maritime Arbitration Commission of the China Council for the Promotion of International Trade (1969-1988).
 The Report of the Working of the CIETAC in 2004.
 The Article 7 of the Arbitration Law of P.R.C
 The Article 16 of the Arbitration Law of P.R.C
 The Article 9 of the Arbitration Law of P.R.C
1. Incapacity of a Party/Invalidity of Agreement: Article V (1) (a);
2. Party Not Given Proper Notice or Unable to Present Its Case: Article V (1) (b);
3. Arbitration in Excess of Jurisdiction: V (1) (c);
4. Defects in Arbitral Composition and Procedure: V (1) (d);
5. Award Not Yet Binding: V (1) (e);
6. Non-arbitrability and Public Policy: V (2) (a) and (b).
 John M. Toth <International Arbitration: Enforcing or Contesting Awards>, available at LexisNexis, www.martindale.com
 ILS International Legal Strategy Maganine2003
 Article 258 of the Civil Procedure Law of P.R.C
 Article 259 of the Civil Procedure Law of P.R.C
 Article 266 of the Civil Procedure Law of P.R.C
 Article 269 of the Civil Procedure Law of P.R.C
 Article 93 of the Civil Procedure Law of P.R.C
 Article 252 of the Civil Procedure Law of P.R.C
 Article 94 of the Civil Procedure Law of P.R.C
 Article 95of the Civil Procedure Law of P.R.C
 Article 255 of the Civil Procedure Law of P.R.C
 Article 260 of the Civil Procedure Law of P.R.C
 Article 261 of the Civil Procedure Law of P.R.C
 Article 13 of Arbitration Law of P.R.C
Article 11 of Judge Law of P.R.C
 The Everyday Newspaper of Workers, Time paper of Security of China , Evening Newspaper of Beijing, China Daily (Aug 2004), Property Magazine of China(April 2005 )…
The Newspaper of People’s Court of China (
Rules 23.1 of Federal Rules of Civil Procedure of
 Article 6 of New York Business Corporation Law
The Article 17 of the International Chamber of Commerce Rule of Arbitration: The parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute. In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate.
 The party can choose their own country’s law solve a dispute when the dispute happen to different country’s party.
 According to Article 16 of the Arbitration Law of P.R.C. a valid arbitration agreement must contain the following 3 elements:
a. The intention to submit the dispute for arbitration;
b. The matters for arbitration;
c. The arbitration commission selected by the parties.
There are more than 160 arbitration commissions in
 If an arbitration agreement has not to include the arbitration commission , the arbitration agreement is invalid. Art.18 of the Arbitration Law of P.R.C.
 According to Article XVI of the New York Convention
says: the Chinese, English, French, Russian and Spanish texts shall be equally
authentic. And the Arbitration Law of the P.R.C. and Article 67 of the
rules of China International Commercial Arbitration Commissions we
know that the parties can choice language which they want. But as a
foreign investor dispute resolution choice arbitration in
 The Article 17 of the International Chamber of Commerce
Rule of Arbitration: The parties shall be free to agree upon the rules of law
to be applied by the Arbitral Tribunal to the merits of the dispute. In the
absence of any such agreement, the Arbitral Tribunal shall apply the
rules of law which it determines to be appropriate. According to the
Article that the parties are free to choose the rules of law to
 . According to Article 50 of the rules of China International Commercial Arbitration Commissions:
(1)Unless otherwise agreed by the parties, this Summary Procedure shall apply to any case where the amount in dispute does not exceeds RMB 500,000yuan, or exceeds RMB 500,000yuan, yet one party applies for arbitration under this Summary Procedure and the other party agrees in writing.
(2)Where no monetary claim is specified or the amount in dispute isn’t clear, the CIETAC shall determine whether or not to apply the Summary Procedure after a full consideration of such factors as the complexity of the case and the interests involved.
Article 57 of the rules of China International Commercial Arbitration Commissions: Change of Procedure
The application of the Summary Procedure shall not be affected by any amendment to the claim or by the filling if a counterclaim exceeds RMB 500,000yuan, the procedure of the case shall be changed from the Summary Procedure to the general procedure unless the parties have agreed to the continuous application of the Summary Procedure.
 If one party is a corporation and is not
individual, there need a stamp, this point is very important in