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Business China (The Economist)

Thursday, July 1, 2004

Undisputed savings

The newly created US-China Business Mediation Centre is looking to offer a low-cost way for Chinese and foreign firms to resolve disputes

China's increasing integration in the global economy has raised the stakes for disputes between domestic and foreign firms. Due to differences in culture, business practices and legal systems, these disputes are often difficult, costly and time-consuming to resolve. The US-China Business Mediation Centre (UCBMC), which was established in January and trained its first group of mediators in early July, is poised to help grease the wheels of international business by facilitating the resolution of Sino-foreign commercial disputes in a cost- and time-effective way.

Discussions on the formation of the UCBMC began over a year ago, when representatives from the China Council for the Promotion of International Trade (CCPIT) contacted the Centre for Public Resources (CPR) Institute for Dispute Resolution, a US non-profit alliance of law firms and businesses, which specialises in various forms of alternate dispute resolution. With the fast growth in trade and investment between the US and China, the two parties saw an obvious need. Disputes accepted by the centre would be jointly mediated by Chinese and Western neutral parties and could help companies avoid the costs of litigation or arbitration. But in order to gain credibility- and attract clients- the centre will have to reconcile the differing conceptions of mediation and defuse the suspicions of bias that often cloud international dispute resolution.

Gaining acceptance

Commercial mediation is gaining in popularity in the US and Europe. More and more, commercial contracts there now include clauses stipulating mediation as the dispute resolution mechanism of first resort, according to Tom Stipanowich, president and CEO of the CPR Institute. Mediation in the US successfully resolves disputes in more than 85% of the cases in which it is used, according to the CPR Institute.

Compared to other common forms of dispute resolution,such as litigation and binding arbitration,mediation is typically cheaper, faster and more flexible. Estimates on cost savings from mediation vary widely, however, as a litigated case can take anywhere from several days to more than a year to reach a conclusion. The CPR Institute surveyed 43 major companies on mediation in 2002, and many reported major cost savings from using mediation instead of litigation or arbitration to resolve disputes. The surveyed companies that provided specific figures said that mediation had saved them at least US$500,000, according to Mr Stipanowich. That survey did not specify how many disputes the companies were involved in, however, so it is not clear how much money was saved per dispute. The results of an American Bar Association survey of the US construction industry conducted in the mid-1990s, also cited by Mr Stipanowich, point to the time-savings of mediation: 90% of the disputes in which mediation was employed were resolved within six days.

The expediency of mediation can be largely attributed to its flexibility and informality. It avoids the often costly sequence of document exchanges and motions that is part of both litigation and arbitration. Mediation can also eliminate court fees which drive up the costs of arbitrating in a third country, which US and Chinese firms have done in the past (such as the recent case between the Shenzhen Development Bank and Newbridge Capital, which was arbitrated at the International Chamber of Commerce in Paris).

The flexibility of mediation also offers the possibility of dispute resolution that is more innovative than the simple monetary settlements that accompany many legal judgements of commercial disputes. For example, Mr Stipanowich notes that commercial disputes often arise from personal issues such as soured or mistrustful relationships, and mediation may allow the parties to mend fences or reconfigure their business relationship in an innovative way. And while the flexibility of mediation makes it potentially applicable in a wide range of disputes, it is often particularly useful in cases involving intellectual property rights infringement or complex construction projects, where small disputes arise frequently and need to be resolved quickly and cheaply, before they metastasise and derail the larger project.

Paying the bills

The UCBMC was established to bring the benefits of mediation to disputes between Chinese and foreign companies (not only US firms, as its name may imply). The centre is initially being funded by the CPR Institute?s members, which include several large multinationals with sizeable China operations, such as GM, McDonald's and Siemens, according to Mr Stipanowich. The UCBMC is expected to be financially self-sustaining through the mediation fees that parties will pay the centre for its services, though the fee structure has not yet been finalised.

To generate that business, UCBMC's initial challenge will be to raise awareness about mediation. Despite the cost savings and flexible dispute resolution offered by mediation, the practice has not been widely used in China. The UCBMC attributes this to a lack of awareness of the benefits of mediation, particularly among Chinese firms, and suspicion of unilateral mediation: foreign firms would likely be hesitant to agree to mediation presided over by a Chinese Communist Party or Ministry of Commerce official, for instance. One participant in the first round of training, James Zimmerman, chief representative at law firm Squire Sanders & Dempsey in Beijing, is confident that the structure of the UCBMC will assuage similar concerns Chinese firms might have of foreign mediators. "With CCPIT support, I believe that Chinese companies will be more amenable to mediation in a forum that has ?foreign? elements," he says.

Pointing to demonstrable success stories, particularly early on, would go a long way towards achieving this publicity. (Though the UCBMC was credited in Chinese media with resolving its first dispute in March, that case was actually mediated by the CCPIT.) Successful mediation will depend largely on the US and Chinese mediators' abilities to instil confidence in their impartiality and bridge the gap in expectations of what mediation can offer, according to Patrick Norton, managing partner of O'Melveny & Myers' Beijing office, who took part in the recent training. When the UCBMC trained its first 26 mediators ?13 from China and 13 from the US and the UK- in early July, the training sessions focused on cultural and business differences between the US and China and on the different expectations that each side has for the mediation process.

Conciliation is a deeply embedded element of conflict resolution in Chinese culture, but Chinese firms see the mediator's role much differently than their western counterparts, Mr Stipanowich says. Chinese participants expect the mediator to take an authoritative, almost judicial, role in mediation proceedings, according to Mr Norton, while Western mediators see their primarily role as a facilitator of discussion, helping the parties reach a solution on their own and proposing solutions only when the parties request them. While mediations in the US and Europe typically have one person mediating the dispute, UCBMC cases will usually feature two-one Chinese and one Western- to help mitigate these differences and preserve a sense of impartiality.

As with mediation elsewhere, some parties will be concerned about the enforceability of the resolution. Mr Norton suggests that this concern might partially be addressed by putting the resolution into the form of an award, which can then be taken to the China International Economic and Trade Arbitration Commission (CIETAC), which can put the decision into the form of an arbitration award that would be legally enforceable, though this procedure has yet to be tested.

Mr Stipanowich is confident that the collaboration of CPR and CCPIT through the centre could produce "a third way" of dispute resolution that combines elements of Western and Chinese standards. As Chinese and foreign firms become increasingly entangled, firms will become more aware of the costs and dangers of litigation and arbitration. As that occurs, UCBMC could play a substantial role in facilitating dispute resolution and saving legal expenses for companies doing business in China.

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