In nearly every transaction, one of the parties raises the issue of compelling arbitration to settle any dispute under the contract. There are good and bad things to be said about arbitration, and whether arbitration is a better route than litigation is highly dependent on the individual transaction, the potential claims each party can anticipate having against the other, and what jurisdiction may hear and decide the dispute. As more and more biotech companies are conducting transactions of all sorts with foreign entities, they’ll need to closely consider the venue options and understand what the consequences will be.
A recent case, China National Metal Prods. v. Apex Digital, Inc. highlights some things that U.S. companies should think about, at least when deciding whether to arbitrate in front of CIETAC in China.
In China National, the parties had contracted for Apex to buy DVD players from China National. Apex placed several orders under different purchase orders, but found that they were getting more complaints and returns for the players than they usually had (though they had continued to place orders, even after receiving the complaints and returns). When China National demanded payment, Apex refused.
Under the primary contract, there was an arbitration clause stipulating that "All dispute[s] arising from or in connection with this Contract shall be submitted to [CIETAC] for arbitration which shall be conducted by [CIETAC] in Beijing or by its Shenzhen Sub-Commission in Shenzhen or by its Shanghai Sub-Commission in Shanghai at the Claimant's option in accordance with [CIETAC's] arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties." Apex filed a Statement of Claim related to 9 of the purchase orders first in Shanghai. Six days later, China National filed its own Statement of Claim regarding payment for 8 purchase orders in Beijing. At all times, Apex maintained that the Beijing panel had no jurisdiction as Apex had filed its claim first, and thus all claims and counterclaims should be heard in the venue it picked. The panels rejected those claims, and two different hearings occurred, one on each party’s claim in the respective cities. To make a long story short, the Beijing panel awarded China National about $10.7 million and said Apex unjustifiably withheld payment.
China National then attempted to enforce the judgment in the U.S. District Court of the Central District of California, and (not surprisingly) Apex appealed the enforcement. The 9th Circuit denied the appeal and upheld the enforcement of the award. Thus begins our cautionary tale of watching all the words in a contract. While it can seem to be incredibly nitpicky (and fellow lawyers, we must admit that at times we do come up with rather awkward and convoluted definitions and clauses), these are the times when narrow precision will more likely work to your advantage. It also demonstrates that it’s good to review the potential arbitrating body’s rules before agreeing to them.
In the U.S., if Party 1 files against Party 2 and if Party 2 has counterclaims against Party 1 that pertain to the original transaction, Party 2 is generally compelled to bring those counterclaims against Party 1 in that lawsuit. If it doesn't, it risks being estopped to raising those claims. The CIETAC arbitration rules do not require this, and there is nothing that would necessarily compel Party 2 to include its claims in the first lawsuit - it is free to pursue its own claim. Here, too, CIETAC found that the claims of the parties were different because Apex's claims involved one other purchase order (generally, this wouldn't be enough reason for a U.S. court to order the parties' claims to be litigated in separate actions).
Under the Federal Arbitration Act (the U.S.'s codification of the Convention on Recognition and Enforcement of Foreign Arbitral Awards), the U.S. court will enforce the foreign arbitral award unless it finds that one of the seven grounds for refusal set forth in the Convention exist. Apex claimed that the pertinent ground for refusal here was that the arbitral procedure was not in accordance with the parties’ agreement. The 9th Circuit said that this was just wrong, as the agreement allowed either of the venues that were used, and used the term “Claimant,” which could refer to either party. Further, the agreement said nothing of making all claims then be heard in one hearing, and deferred to CIETAC rules on that issue. CIETAC rules said nothing about compelling all claims in a transaction/matter to be brought into one hearing. Thus, the 9th Circuit said that the hearings were definitely inefficient, but they were completely in line with the parties’ contract and with CIETAC rules and there were, therefore, no grounds for refusing enforcement of the award.
Bottom line: 1) Be careful in keeping the venue choice open to more than one possibility. Sometimes this won’t matter or it’s advantageous to allow a choice, but it merits more than a passing consideration. 2) Be careful in how you define a “claim” or “claimant.” This is often defined only as “one who has a claim,” but consider dotting the i’s and crossing the t’s to explicitly state that it’s “one who has a claim or a counter-claim against the party making the original claim” (or similar language that fits your situation – this is very quick from the top of my head and needs more wordsmithing). 3) Read (or have litigation counsel read) the arbitrating body’s rules before agreeing to have them arbitrate the claim. Do they allow for multiple claims? For discovery? For any appeal?
There are several landmines that can come up with private international arbitration, but this China National case illustrates why it’s crucial to pay attention to the dispute provision in a contract.
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