Commercial Dispute Settlement in China-United States Trade: Conciliation in Perspective
FORDHAM INTERNATIONAL LAW JOURNAL [Vol.
Fordham International Law Journal
Copyright c 1982 by the authors. Fordham International Law Journal is produced by The
Berkeley Electronic Press (bepress). http://ir.lawnet.fordham.edu/ilj
This Note analyzes the Chinese approach to commercial dispute settlement in the context of
international contracts. Part I examines article VIII, the dispute settlement portion of the Trade
Agreement, and the Chinese procedures for private dispute settlement. Part II discusses the
problems of legal uncertainty that exist in the Chinese approach and the prospect of emerging
Chinese law. Part III discusses the current importance of conciliation in Chinese dispute settlement,
presents a case study of an actual joint conciliation conducted in China, and evaluates the results.
COMMERCIAL DISPUTE SETTLEMENT IN
CHINA-UNITED STATES TRADE:
CONCILIATION IN PERSPECTIVE
With a quarter of the world's population,' the People's
Republic of China is potentially the United States' most significant new
trade partner of the century.2 The dramatic increase in the volume
of annual bilateral trade between the United States and China from
near zero in 1970 to almost five billion United States dollars ten
years later 3 appears to be the beginning of an expanding
commer1. A widely accepted estimate is that China has approximately one billion people. See
3. the bulk of the peasantry makes about 20c per person per day from
4. the Chinese authorities admit that ten percent of the population (100
million people) do not have enough to eat (other reports speak of 200 million peasants
being in a condition of acute privation);
5. per capita grain production today is the same as it was twenty years ago;
6. annual foreign trade turnover is less than $20 a head; and
7. the $1 billion current trade with the United States represents one-third of
one percent of total U.S. trade.
Prybyla, Comments, 5 INT'L TRADE L.J. 45, 46 (1979). But see Berney, China's Growing
Consumer Market, CHINA Bus. REv., Mar.-Apr. 1981, at 18 (indicating the rapid expansion
of China's market for ready-made consumer goods); Rising PurchasingPower, BEIJING REV.,
Sept. 6, 1982, at 7 (indicating the rising purrhasing power of Chinese households).
cial partnership. 4 If the United States can increase its share of the
Chinese market to twenty percent, 5 the value of trade with China
could increase to an amount between ten and sixteen billion dollars
China is already a significant participant in United States
international trade. After Japan and South Korea, 7 China is the
United States' third largest Asian customer, 8 and the potential for
future growth is great.9 For the first time in its long history, China
4. See infra note 9, which indicates the complementary natures of the United States and
5. In 1980, the United States share of the Chinese market was only about 12%.
Hearings,supra note 2, at 198 (prepared statement of David S. Tappan). In comparison, the
Japanese share was about 25%. Id.
Both Japan's and the United States' share of the Chinese market is estimated to have
dropped in 1981 despite a larger volume of trade with China by both countries (as measured
in United States dollars). See China Data, CHINA Bus. REv., Jan-Feb. 1982, at 67, 69. This
evidences China's increasingly active role in world trade. A further indication of the
continued expansion of China's foreign economic and trade relations is the growing number of trade
agreements and economic cooperation agreements with other countries. Between 1970 and
1980 about 140 such agreements were signed, 50 of which were signed from 1978 to 1980.
Ren Jianxin, China's Foreign Economic and Trade Law-Work Is Progressing 4 (Jan. 1981)
(unpublished) (on file at the Fordham InternationalLaw JournalOffice) (Mr. Ren is
Director, Legal Affairs Department, China Council for the Promotion of International Trade).
6. Hearings,supra note 2, at 209 (prepared statement of Mary Ames Wadsworth, Area
Vice-President, People's Republic of China, Allis-Chalmers Corp.).
7. Id. at 198 (prepared statement of David S. Tappan).
8. Id. at 193 (statement of Congressman Stephen J. Solarz, Chairman of the House
Subcomm. of Asian and Pacific Affairs).
9. See id. at 208 (prepared statement of Mary Ames Wadsworth). "China is rich in
energy resources, and the U.S., while needing resources, is highly advanced in the
technological skills and means of resource exploitation." Id. China is fourth in the world in energy
production, Clarke, Commercial Implication of Normalization, 5 INT'L TRADE L.J. 93, 97
), and greatly in need of Western technology. Dole, Comments, 5 INT'L TRADE L.J. 60,
). See also Wang, The People'sRepublic of China-IndustrialPowerwith a Strong
Mineral Base, in How TO Do BuSINESS WITH CHINA 325-39 (
) (discussion of oil and gas
By 1979, petroleum had become China's leading export to the United States. Mathews,
Petroleum Becomes Peking's Top Export to U.S., Wash. Post, Aug. 27, 1979, at 23, col. 1.
China exports approximately 300,000 barrels of oil a day, which earned U.S. $4 billion in
foreign exchange last year. Farnsworth, China Starts to Play Its Oil Card, N.Y. Times, Sept.
5, 1982, at F4, col. 3. However, some experts predict that China will become a net importer
of oil in the future. Id. China intends to further develop its oil resources and is interested in
American business participation. Id. See generally Wren, China Energy: Chance for U.S.,
N.Y. Times, Oct. 14, 1982, at Dl, col. 3 (discussing potential for American business). During
1979 and 1980, American oil exploration companies conducted seismic surveys in the South
China Sea and thereby won the right to bid for the development of China's offshore oil
resources. Woodard & Goodwin, Supplying Offshore Services, CHINA Bus. REv., Mar.-Apr.
1982, at 9. The surveys cost the companies an estimated $200 million and were free to the
Chinese. Id. Bids have also been made for exploration rights in the Yellow Sea. OffshoreBids
is actively encouraging foreign investment. 0 To help smooth the
way for increased trade relations, the United States and China
signed the Agreement on Trade Relations Between the United
States of America and the People's Republic of China (Trade
Agreement) in 1979."
The Trade Agreement includes a provision for the resolution of
contract disputes1 2 which in effect incorporates the Chinese
apUnder Review, CHINA TRADE REP., Sept. 1982, at 11. Contracts for development should be
signed by mid-1983; all exploration costs will be borne by the foreign companies. Green,
Offshore Business, CHINA Bus. REv., May-June 1982, at 17. The terms of the model contract
issued by the Chinese emphasizes China's determination to be in control of the undertaking
and to expand its own capabilities to conduct future offshore operations. Brown, Tough
Termsfor Offshore Oil, CHINA Bus. REv., July-Aug. 1982, at 34. The total cost oflexploration
for the areas of the first round of bidding is estimated to be between $2 billion and $3 billion.
Id. at 35. See generally Note, Legal Aspects of Sino-American Oil Exploration in the South
China Sea, 14 J. INT'L L. & ECON. 443 (1980).
Furthermore, "China has a wealth of human capital, and America has much to offer in
economic management and organizational skills." Hearings,supra note 2, at 208 (prepared
statement of Mary Ames Wadsworth). American management skills are being taught by
American professors to Chinese technocrats at the Dalian Institute of Technology, Dalian,
China. The Dalian program is considered the "most successful ingredient of the
ChineseAmerican protocol on scientific and technical cooperation." Wren, Chinese Get Latest Word
on U.S. Management Skills, N.Y. Times, Aug. 17, 1982, at A6, col. 1.This program costs the
United States about $160,000 a year. Id. See also Reed, Student Exchange: Far East Meets
Midwest, N.Y. Times, Aug. 22, 1982, § 12, at 43.
In some respects United States and Chinese business ideologies are growing closer, with
China "embracing capitalist-style incentives .... Nixon, supra note 1, at E19, col. 6.
China is now encouraging domestic private enterprise. See Help Wanted-China Fights
Unemployment, TIME, Dec. 7, 1981, at 60; Wren, China, To Relieve Unemployment, Gives
Private Sector More Leeway, N.Y. Times, Nov. 24, 1981, at Al, col. 1. By offering
laborintensive means of production for cooperative ventures with the Chinese, the United States
may help alleviate China's unemployment problem. See Hearings, supra note 2, at 203
(statement of Mary Ames Wadsworth).
10. Cohen, The Year of the Law, in A NEW LooK AT LEGAL AspEcTs OF DOING BUSINESS
WITH CHINA 139, 142-43 (H. Holtzmann & W. Surrey eds. 1979). See supra note 9. Within
China itself " 'Special Economic Zones' are being developed for the purposes of promoting
foreign trade and improving foreign trade management." Ellis, Decentralizationof China's
Foreign Trade Structures, 11 GA.J. INT'L & ComP. L. 285 (1981).
INT'L L.F. 51 (
) for a discussion thereof.
12. Trade Agreement, supra note 11, art. VIII. Article VIII reads as follows:
1. The Contracting Parties encourage the prompt and equitable settlement of
any disputes arising from or in relation to contracts between their respective firms,
proach to commercial dispute settlement. 3It encourages parties to
a dispute to resolve their differences through "friendly
consultations, conciliation or other mutually acceptable means." 1 4 Should
these means prove ineffective, the Trade Agreement provides for
recourse to arbitration. 15 The Chinese, however, are reluctant to go
to arbitration, even in China, and prefer friendly consultation and
companies and corporations, and trading organizations, through friendly
consultations, conciliation or other mutually acceptable means.
2. If such disputes cannot be settled promptly by any one of the
abovementioned means, the parties to the dispute may have recourse to arbitration for
settlement in accordance with provisions specified in their contracts or other
agreements to submit to arbitration. Such arbitration may be conducted by an arbitration
institution in the United States of America, the People's Republic of China, or a
third country. The arbitration rules of procedure of the relevant arbitration
institution are applicable, and the arbitration rules of the United Nations Commission on
International Trade Law recommended by the United Nations, or other
international arbitration rules, may also be used where acceptable to the parties to the
dispute and to the arbitration institution.
3. Each Contracting Party shall seek to ensure that arbitration awards are
recognized and enforced by their competent authorities where enforcement is
sought, in accordance with applicable laws and regulations.
13. Surrey & Soble, United States Law and TreatiesAffecting China Trade, in A NEW
LOOK AT LEGAL AsPEcTs OF DOING BUSINESS WITH CHINA 13, 28 (H. Holtzmann & W. Surrey
14. Trade Agreement, supra note 11, art. VIII, para. 1.
15. Id. para. 2. The Trade Agreement does not demand that arbitration proceedings
take place in China, nor does it require that parties submit to such proceedings according to
Chinese rules. See id. However, the Chinese are reluctant to submit their disputes to foreign
arbitration panels and in their contracts or other agreements with the foreign party may
refuse to provide for arbitration outside of China. Theroux, Arbitrationin China? You May
Need a ChineseLawyer, CHINA Bus. REV., May-June 1982, at 38. "More and more contracts
provide for arbitration to be conducted in China." Ren, supra note 5, at 8. However, there is
evidence that the Chinese have become less hostile to arbitration in neutral settings (third
countries). Yeow, Arbitration, CHINA Bus. REV., Nov.-Dec. 1981, at 48. See also Comment,
An Evaluationof the People'sRepublic of China'sParticipationin InternationalCommercial
Arbitration:PragmaticProspectus, 12 CAL. W. INT'L L.J. 128, 137 (
) which attests to
China's acceptance of "Western-style" international arbitration.
More than half of all United States-China trade contracts contain clauses which specify
arbitration in third countries. Yeow, supra. The Chinese may include such clauses to meet
the demands of their trading partners. Id. at 49. A problem that may arise with some
contracts results from the lack of a clearly defined "trigger mechanism" which starts the
arbitration process. Without an effective "trigger mechanism," either party to a dispute may
resist arbitration by claiming that an amicable solution can still be found. Id. at 50.
Furthermore, some contracts call for arbitration in China if the Chinese party is the
defendant, and in a third country only if it is not. Id. at 49. See also Ren, supra note 5, at 8
(indicating approval of providing for arbitration in the defendant's country). In such a case,
should the defendant be Chinese, the foreign party may not be permitted to have other than
Chinese legal representation. Theroux, supra, at 39. See also infra notes 36-41, 79-81 and
conciliation as means for settling disputes.' 6 It is therefore
important for the American businessman to understand how the Chinese
mechanisms for dispute resolution function.
The Chinese approach to commercial practices in general, and
to methods of resolving contract disputes in particular, are
unfamiliar and, in many ways, fundamentally different from those used in
the West. The Chinese avoid going to court, especially over
commercial matters.17 Their methods of settling commercial disputes
are among the most informal in the world. 8 "[T]hey have
abolished the opportunity for adversaries in a dispute to squander their
energies and fortunes in legal combat in a court of law,"' 9 a
noteworthy achievement. However, a definite dispute resolution
procedure that gives confidence to the trader or transnational investor
does not exist.
This Note analyzes the Chinese approach to commercial
dispute settlement in the context of international contracts. Part I
examines article VIII, the dispute settlement portion of the Trade
Agreement, and the Chinese procedures for private dispute
settlement. Part II discusses the problems of legal uncertainty that exist
in the Chinese approach and the prospect of emerging Chinese law.
Part III discusses the current importance of conciliation in Chinese
at 49. See also infra notes 36-43, 75-80 and accompanying text.
17. See infra notes 36-40 and accompanying text. Economic courts have recently been
established- more than one thousand since 1980. Allen & Palay, Economic Courts, CHINA
Bus. Ray., Nov.-Dec. 1981, at 44. They are empowered to dispose of economic and trade
disputes involving a foreign party. Id. "Foreign litigants who want to have attorneys to act
for them to protect their rights and interests must appoint lawyers of Chinese nationality."
Ren, supranote 5, at 7. In China, lawyers represent the facts, not the client, and will refuse
to represent a client believed to be "incorrect"; furthermore, on appeal, according to Chinese
law, lawyers who believe that the lower court ruling was proper "must remain silent." Allen
& Palay, supra, at 48. However, Chinese courts of law do not take jurisdiction over foreign
trade disputes where an arbitration agreement is in force. See infra note 43. See also
Pattison, China's Developing Legal Frameworkfor Foreign Investment: Experience & Ex
pectations, 13 LAW & POL'Y INT'L Bus. 89, 138-41 (1981) (discussion of the economic courts).
The United States Justice Department has decided to permit the Chinese to sue in
American courts. This is based on its finding that legal reciprocity now exists between the
United States and China. Lewin, U.S. Allows Chinato Sue It, N.Y. Times, Nov. 2, 1982, at
D9, col. 4.
18. See infra notes 38-45 and accompanying text for a discussion of the Chinese resolve
to avoid legal formalities.
19. NATIONAL COUNCIL FOR UNITED STATES-CHINA TRADE, SPECIAL REPORT No. 4,
ARBiTRATION AND DISPUTE SETTLEMENT IN TRADE WITH CHINA 4 (1974) [hereinafter cited as
dispute settlement, presents a case study of an actual joint
conciliation conducted in China, and evaluates the results.
I. PRIVATE DISPUTE SETTLEMENT: THE TRADE
AGREEMENT AND THE CHINESE APPROACH
The encouragement of settling international disputes by
private settlement mechanisms is becoming the norm in United States
agreements with socialist countries,2' 0 and arbitration clauses
currently are standard practice in contracts between Western
corporations and socialist foreign trade organizations. 2' Arbitration 22 has
been preferred by Western businessmen in order to avoid the
uncertainties and complications associated with litigation in foreign
courts. 3 Furthermore, because arbitration proceedings generally
do not result in published opinions,2 4 they preserve the
confidentiality of commercial arrangements.2 5
arbitrators rather than by litigation in the courts. Holtzmann, supra note 21, at 77.
23. The significant advantages of arbitration over litigation can be summarized as
a) Since arbitrators are normally chosen directly by the parties, they enjoy
b) For the same reason, they may be particularly competent for the settlement
of a certain dispute.
c) In international contract cases, the arbitrators may be of different
nationalities, and more specifically they-or one of them-may be of a nationality other
than those of the parties.
d) The parties may choose any place they like as the place of the arbitration.
e) The parties may, within the limits of the public policy of the country where
the arbitration is being held, adopt whatsoever rules of procedure they like and
select the language in which the arbitration is to be conducted.
f) The procedure is therefore much more flexible, and thus normally faster,
than court procedure.
g) The arbitration award is normally final and immediately binding upon the
parties, and only subject to being set aside for one of several specific reasons.
h) Recognition and enforcement of arbitration awards are, as a consequence of
existing international conventions widely ratified, easier than recognition and
enforcement of court judgements.
Berlingieri, InternationalMaritime Arbitration, 10 J. MAR. L. & COM. 199, 199-200 (
24. See, e.g., INTERNATIONAL CHAMBER OF COMMERCE, PUB. No. 291, RULES OF
CONCILIATION AND ARBITRATION OF THE ICC art. 23(
) (1975) [hereinafter cited as ICC RULES]. In
the United States, arbitration may be chosen because it usually precludes review of any sort.
"[T]he AAA [American Arbitration Association] apparently discourages the practice of
written arbitral opinions in order to insulate the arbitral process from any judicial review." I/S
Stavborg v. National Metal Converters, Inc., 500 F.2d 424, 429 (2d Cir. 1974) (footnote
omitted). In China, arbitral awards are explained in writing, and open hearings are
encouraged; the purpose of open hearings is to educate bystanders as well as disputants. Holtzmann,
A New Look at Resolving Disputes in U.S. -China Trade, in A NEW LOOK AT LEGAL ASPECTS
OF DOING BUSINESS WITH CHINA 235, 329 (H.. Holtzmann & W. Surrey eds. 1979).
25. The Chinese system for dispute resolution offers similar advantages and
disadvantages to Western arbitration proceedings. The difficulty of assessing the fairness of arbitration
awards and other settlements because of' the unavailability of reports thereon, SPECIAL
REPORT, supra note 19, at 15-16, creates the advantage of preserving the confidentiality of the
commercial arrangements of the parties. See supra notes 20-24 and accompanying text. See
generally 1-5 J. WTni, THE INTERNATIONAL ARBITRATION PROCESS: PUBLIC AND PRIVATE
) (extensive treatment of the subject). Because arbitration is less formal and less divisive
than court proceedings, it provides a means for resolving disputes in a manner more likely to
preserve good will between the parties. Thus arbitration is to be preferred especially where
the parties are committed to maintaining a harmonious relationship. Stevenson, An
Introduction to ICC Arbitration, 14 J. INT'L L. & ECON. 381, 381 (1980).
The existence of a comprehensive commercial law does not necessarily mean that such a
law will control in an arbitration proceeding. "In the United States the arbitrators are not
The Trade Agreement encourages private settlement of
international contract disputes through the use of several novel
provisions. 2 Included are: pre-arbitral procedures2 7 not found in
previous trade agreements; 28 the possibility of new arrangements; 2 a
broad definition of disputes covered; 0 greater emphasis on
institutional arbitration; 3 ' direct reference to a set of recognized
international arbitration rules; 32 and government aid in obtaining legal
enforcement of international awards. 33 What is striking about the
Trade Agreement is that the provisions relating to dispute
resolution are not limited to arbitration. Included are "friendly
consultations, conciliation or other mutually acceptable means." 34 These
terms are absent from the trade agreements between the United
States and other countries. 35 The Chinese have a clearly stated
preference for friendly negotiation 3 or conciliation; 37 both
procedures are less formal than arbitration.
What appears to be typical of the Chinese approach is the
proclivity to avoid legal formalities of any kind.38 The Chinese
33. Id. para. 3. However, despite reference thereto in art. VIII, para. 2, it should be
noted that unlike the United States, China is not a signatory to the United Nations
Convention for the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature
June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997, 330 U.N.T.S. 38. It was acceded to by the
United States on September 30, 1970, and incorporated into domestic law in 9 U.S.C.
§§ 201-208 (1976). "China... is unwilling to entrust dispute resolution to an international
body; it favors bilateral negotiations between the parties." Li, Sovereignty at Sea: China and
the Law of the Sea Conference, 15 STAN. J. INT'L STUD., 225, 235-36 (
). Because China is
not a signatory to the United Nations Convention for the Recognition and Enforcement of
Foreign Arbitral Awards, supra, China is not necessarily bound to enforce such awards as a
matter of international law. Surrey & Soble, supra note 13, at 32. Whether the United States
is bound by the terms of the Trade Agreement regarding the enforceability of arbitral awards
when the Chinese may not be, is, given the current state of affairs, ambiguous. Id. It might
be wise for the parties negotiating contracts with China to include a provision about the
enforcement of arbitral awards in their contracts and joint venture agreements. Id.
34. Trade Agreement, supra note 11, art. VIII, para. 1.
35. See, e.g., United States-Hungary Agreement on Trade Relations, supra note 20.
36. See Jen & Liu, People's Republic of China, 3 Y.B. COM. ARa. 153, 153 (P. Sanders
ed. 1978). Because friendly negotiation is, in effect, private discussions between parties to a
dispute, reports thereof are generally unavailable.
37. See Trade with China, 65 A.B.A. J. 1063, 1065 (
). See infra notes 108-12 and
accompanying text for a discussion of conciliation in China today. It should be noted that the
encouragement of conciliatory settlements is not uniquely Chinese. For example, the
International Chamber of Commerce has also encouraged conciliation as an option to arbitration.
See, e.g., ICC RuLEs, supra note 24, arts. 1-5.
38. See McCobb, Foreign Trade Arbitration in the People's Republic of China, 5
N.Y.U. J. INT'L L. & POL. 205, 206-08 (1972).
Chinese reluctance to engage in legal formality is indicated by an unwillingness to
exchange formally memoranda of a tentative agreement to have a joint conciliation between
the American Arbitration Association (AAA) and the Foreign Trade Arbitration Commission
of China. Diary II, supra note 25, at 3. A successful joint conciliation did take place, but
when a settlement was finally reached, the Chinese refused to sign a statement of settlement
terms, insisting that such formality was unnecessary. Id. at 108. The Chinese were reluctant
to sign and are generally reluctant to put things in writing because the individual Chinese
bureaucrat is less exposed to recriminations from the Chinese bureaucracy when writings are
resort to arbitration 39 procedures only when less formal methods
fail to reach an acceptable settlement. 40 As a result, the vast
majority of disputes in China never reach the arbitration stage. Over
ninety percent of the cases in which Chinese international arbitral
institutions participate are settled by friendly consultation or
conciliation. 41 About ten to fifteen percent of the settlements come
unavailable. Personal communication by Donald B. Straus, author of Diary II, to the author
of this Note (Sept., 1982). The American party and the AAA agreed that signing was
unnecessary because it was felt that insistence on signing would be damaging to future joint
conciliations. Id. For a more complete synopsis of this joint conciliation, see infra Part III of
However, despite their aversion to formalistic mechanisms for resolving disputes, the
Chinese have earned a reputation as strict constructionists of the controlling provisions of
commercial contracts. Surrey & Soble, supra note 13, at 32.
"So strict is Chinese insistence on adherence to the contract that several European
manufacturers have been known to encounter Chinese complaints or even refusal to accept
the goods when they shipped at no added cost pieces of machinery that were newer models
than those actually specified in the contract." Lubman, supra note 25, at 138. "Requiring
very strict compliance with contract specifications . . . is commonly found in all
bureaucracies whose officials wish to avoid being blamed for purchasing or accepting defective foreign
goods." Lubman, supra note 16, at 6. Because the Chinese have this "strict constructionist"
attitude toward contracts, the United States Department of Commerce urges businesspeople
to press for inclusion of all terms. INDUSTRY & TRADE AD., U.S. DEP'T OF COM., STOCK No.
003-009-00316-4, DOING BUSINESS wrrI CHINA 12 (
), reprinted in How To Do BUSINESS
WITH CHINA 215 (
) [hereinafter cited as DOING BusINESS]. "Grave uncertainty exists...
as to the law governing circumstances outside the four corners of the document." Hudspeth,
The Natureand Protectionof Economic Interestsin the People'sRepublic of China, 46 ALB.
L. REv. 691, 699 (
). "Contract law . .. remains the vaguest area of China's civil
economic law." Kato, Civil and Economic Law in the People'sRepublic of China, 30 AM. J.
COMp. L. 429, 449 (1982). See generally Hsiao, Role of Economic Contractsin Communist
China, 53 CAL. L. REV. 1029 (1965). However, in most cases the American businessman will
find that negotiating the terms of his choice is not an easy matter. See infra notes 77-81 and
accompanying text for a discussion thereof.
39. Arbitration is more formal than either friendly negotiation or conciliation; less
formal, of course, than litigation.
40. Lubman, supra note 16, at 45. "Many host developing countries have reservations
about international arbitration." United Nations Economic & Social Council, Commission on
Transnational Corporations, Transnational Corporations in World Development: A
Reexamination, U.N. Doe. E/C.10/38, para. 404 (1978) ("Latin American States have
traditionally opposed international arbitration as a derogation from their sovereignty .... " Id.)
"[A]t its current state of economic development, China is a developing country." Trade
Agreement, supra note 11, art. II, para. 3.
41. Holtzmann, supra note 24, at 255, 346 n.23. This figure may appear high to
Americars but settlement of large numbers of cases before an arbitral award is made is not
uniquely Chinese. Approximately 50 % of the cases handled by the ICC are settled before an
award is made. Id. at 255. Approximately 40% of the cases handled by the AAA are so
settled, with a like percentage reported for the Foreign Trade Arbitration Commission of the
U.S.S.R. Id. Japan reports an even higher percentage of settlements before awards were
issued than China. For example, during the first half of 1974, out of 1,497 cases received by
after the conciliators make non-binding recommendations.42-
Arbitration is thus merely an auxiliary process to friendly consultation
the Japan Commercial Arbitration Association, only five were settled by arbitration.
JapanChina Trade Agreement Concluded, Q. JAPAN CoM. AR. A., Apr.-Sept. 1974, at 8.
Consultation was effectively used to reach a settlement in 1,119 of those cases; adjustment on the
complaint was used in 373 cases; conciliation was not used. Id. In comparison, during that
same year, of the over one hundred commercial and maritime disputes submitted for
arbitration in China, all but twelve were settled by friendly negotiation. AAA Visit to FTAC of the
People's Republic of China, January 16-28, 1975, from notes taken by Donald B. Straus, at
32 (unpublished) (available at the AAA Library in New York with Mr. Straus' permission)
[hereinafter cited as Diary I]. Of the twelve that reached the conciliation stage, only one
went to arbitration. Id. See also G. HsIAo, FoREICN TRADE OF CHINA: POLICY, LAW AND
PRACTICE 156-57 (1977).
42. Holtzmann, supra note 24, at 255, 346 n.23.
43. See Trade Agreement, supra note 11, art. VIII, para. 2. Despite the dearth of cases
which go to arbitration and the likelihood that most disputes be resolved "amicably," the
availability of an effective procedure for arbitration can be vital. Its availability can provide
a strong impetus to compel serious attempts to settle disputes by informal means and can also
safeguard against unacceptable delay in friendly consultation and conciliation. Furthermore,
an effective arbitration clause becomes indispensible should the dispute remain unresolved by
friendly consultation and conciliation. Holtzmann, supra note 24, at 322. See supra note 15
for discussion of arbitration in China.
One major advantage that the Chinese report is their ability to reach a settlement in
considerably less time than their Western counterparts. Diary I, supra note 41, at 68. The
average time for friendly negotiations in China was reported to be six months, and for
arbitration, twelve months. Id. This compares favorably with ICC arbitration proceedings,
which generally last at least eighteen months, and sometimes as long as five years. Goekjian,
ICC Arbitrationfrom a Practitioner'sPerspective, 14 J. INT'L L. & ECON. 407, 430 (1980)
(figures for the fiscal year 1977). Litigation in the United States is, on the whole, a slower
process than the Chinese mechanism for resolving disputes, and resembles in timing the ICC
arbitration procedure. For example, according to a 1980 report, a civil trial in a federal
district court took an overall average time of twenty months. ADmINISmRATIVE OFFICE OF THE
U.S. COURTS, ANN. REP. OF THE DIRECTOR 393 (1980). See id. at 393-96 for detailed tables
showing times required by United States District Courts to dispose of civil cases.
However, there are reports which indicate that Chinese contentions of quick settlement
are inaccurate, and that in the past many economic disputes could not be settled quickly by
using informal means. Allen & Palay, supra note 17, at 45. This led to the creation of
economic courts. Id. No foreign company has yet appeared in an economic court. Id. at 48.
See supra note 17 for a discussion of the newly created economic courts.
"The Chinese courts of law do not seize cases of foreign trade and maritime disputes
where an arbitration agreement is in force." Jen & Liu, supra note 36, at 156. The same
could be said of American courts. In Scherck v. Alberto Culver, the Supreme Court held that
"the agreement of the parties in this case to arbitrate any dispute arising out of their
international commercial transaction is to be respected and enforced by the federal courts in
accord with explicit provisions of the Arbitration Act." 417 U.S. 506, 519-20 (1974). See also
Federal Arbitration Act, 9 U.S.C. §§ 1-208 (1976). This legislation initially was enacted in
1925. Act of February 12, 1925, Pub. L. No. 68-401, 43 Stat. 883 (1925). Its constitutionality
was unsuccessfully challenged in Marine Transit Corp. v. Dreyfuss, 284 U.S. 263 (1932).
The preference for informal dispute resolution is not limited to
the Chinese. 44 This approach is compatible with the American
preference for avoiding commercial litigation in countries such as
China, where relatively little is known about the practice and
procedure of a legal system so fundamentally different from that of
the United States. 45 Nonetheless, an effective understanding of the
meaning of and the relationship among friendly consultation,
conciliation and arbitration is crucial.
Typically, friendly consultation is the first step in resolving a
dispute and is expected to continue even if the parties begin
conciliation, or even arbitration. 4 Conciliation, while generally
preceding arbitration, may likewise take place while arbitration is in
progress. 47 Thus, the Chinese approach is not composed of distinct
and separated processes occurring in rigid sequence, but in fact is a
flexible system of procedures which may or may not be employed
A. Friendly Consultation
Friendly consultation 49 is the attempt to settle a dispute
through discussion and correspondence by the parties themselves. 50
It can be compared to pre-trial negotiation between litigating
It has been suggested that arbitration clauses are included in contracts solely to avoid the
jurisdiction of foreign courts, and that the Chinese have no actual intention to go to
arbitration. Note, Foreign Investment in the People's Republic of China: Compensation Trade,
Joint Ventures, IndustrialProperty Protection and Dispute Settlement, 10 GA. J. INT'L &
CoMP. L. 233, 260 (1980). See Henderson & Matsuo, Tradewith Japan,in LAW AND PoLrrTcs
IN CHINA'S FOREIGN TRADE 54 (V. Li ed. 1977).
44. See Lohr, Tokyo Air Crash:Why the JapaneseDo Not Sue, N.Y. Times, March 10,
1982, Al, at D5, col. 3. "The, lack of litigiousness in Japan is often cited as an economic
advantage. The Japanese, it is said, do not spend much time, money or energy suing each
other but, instead, concentrate on outproducing other nations." Id. See also Holtzmann, Use
of Impartial Technical Experts to Resolve Engineering and Other Technological Disputes
Before Arbitration,in COMMERCIAL ARBITRATION: ESSAYS IN MEMORIAM EUCENIO MINoti 233
45. Holtzmann, supra note 24, at 246.
46. Id.at 247.
47. Id. at 247-48. "Arbitration and conciliation are interrelated and complementary to
one another. They are not antagonistic and do not exclude each other." Jen & Liu, supranote
36, at 155.
48. Holtzmann, supra note 24, at 247.
49. "Consultation" is sometimes used synonymously with "negotiation." See id. at 248.
50. Id. at 249.
ties followed by a settlement out of court, a process with which
American lawyers are familiar. 51 The Chinese tendency is toward
maintaining friendly relationships. 52 "In traditional Chinese
society, law often was equated with coercion .... -153 A failure to
resolve commercial disputes through negotiation and compromise
implies that the disputants may not be honorable or reasonable
The Chinese prefer to negotiate a settlement in terms of future
business dealings and are reluctant to make cash payments in
settlements. 55 In this way, continuing business relationships are not only
encouraged, but assured; thus, a dispute can give rise to additional
commerce between the parties according to the terms set forth by
the settlement reached . 5 "Friendly" relations are preserved.
The unique aspect of friendly consultation in modern
commercial disputes is the practice of third party assistance at the request of
the disputants. 57 In China this assistance may be administered by
the Foreign Economic and Trade Arbitration Commission
(FETAC) 58 or the Maritime Arbitration Commission (MAC). 59 The
process of friendly consultation thereby encompasses the attempt to
settle the dispute by the parties themselves and a process in which
they are assisted by a third party.
It is difficult to determine the point at which friendly
consultation conducted with the assistance of third parties ends and the
process of conciliation begins. 60 The Trade Agreement defines
neither term."' However, there is a distinction: "[C]onciliation begins
when one or more third parties are designated as conciliators and
embark on a process of assisting the parties to gather facts and
analyze their dispute in a deeper and more systematic way than
generally occurs in friendly consultation. '62 Unlike
arbitrationwhere the arbitrator's decision is final and binding 3 -the parties to
a dispute are free to adopt or reject the proposal of the third party.64
promises," Jen & Liu, supra note 36, at 154, and are resolutely opposed to national egoism, in
making use of arbitration to favor the party of their own nationality. Id. at 153-55.
When ascertaining the rights and obligations of the contracting parties, the FTAC
and the MAC also have to refer to those reasonable international practices which
have formed themselves in a long period of time in world trade and are favourable
to the development of international trade and marine transport. In short, in
handling cases, the FIAC and the MAC not only abide by the Chinese laws, observe the
provisions of the contracts signed by the parties, but also pay due regard to the
international practice. Combining these three elements organically, they are able to
solve problems in a fair, reasonable and truth-seeking way.
In concrete work, the FTAC and the MAC adopt the method of combining
arbitration with conciliation .. . .An arbitral award is made . . . only where the
dispute cannot be settled through conciliation. Experience proves that most of the
cases seized by the FTAC and the MAC can be settled by conciliation in the course
of investigation or examination, prior to the arbitration proceedings or before an
award is granted. This is welcomed by both of the disputing parties, Chinese and
foreign. The FTAC and the MAC put emphasis on investigation and study. When
handling cases, they not only examine statements of facts from the disputing parties,
but also listen to the views of other persons concerned, and make investigations on
the market or on the spot whenever necessary and possible, which enables them to
draw a clear line between the right and the wrong, to ascertain liability, to be fair
and reasonable and truth-seeking.
Id. at 154.
60. Holtzmann, supra note 24, at 249.
61. See Trade Agreement, supra note 11, art. VIII, para. 1.
62. Holtzmann, supra note 24, at 250.
63. "An arbitration award once made has the force of law. ..J.en & Liu, supranote
36, at 159.
64. "Conciliation . .. does not lead to any binding judgements or demands on the
disputing parties." Shen, supra note 58, at 4. However one commentator suggests that the
As a means of dispute settlement, conciliation is favored by the
Chinese because it is more conducive to continuing friendship and
trade relations 65 than is arbitration. However, contrary to a belief
that appears prevalent in the West, the Chinese may not be
opposed to arbitration.66 The Chinese do not consider a request for
arbitration an unfriendly act, 7 provided that a serious effort to
settle the case through friendly negotiations and conciliation has
been made.6 8 The Chinese do not consider arbitration and
conciliation to be mutually exclusive or antagonistic, but rather,
complementary processes that may be carried on concurrently. 9
The participation of arbitrators in the process of conciliation is
not unique to the Chinese. Its acceptance in the West is confirmed
by the Code of Ethics for Arbitrators in Commercial Disputes, 70
It is not improper for an arbitrator to suggest to the parties that
they discuss the possibility of settlement of the case. However,
an arbitrator should not be present or otherwise participate in
the settlement discussions unless requested to do so by all
parties. An arbitrator should not exert pressure on any party to
As occurs in friendly negotiations with the assistance of third
parties, the role of the conciliator in trade disputes in China is
compulsion to conciliate is so great that the nature of conciliation is not voluntary at all.
McCobb, supra note 38, at 207. "Indeed, mediators are praised for seeking out and settling
disputes even before the parties have decided upon mediation." Id. One author suggests that
the non-binding recommendation process is but an extension of friendly negotiation and
makes no mention of conciliation. See Note, An Analysis of Chinese ContractualPolicy and
Practice, 27 WAYNE L. REv. 1229, 1248 (1981).
65. Jen & Liu, supra note 36, at 155.
66. See Liu Y., Foreign Trade and Maritime Arbitration 9 (1976) (unpublished
manuscript) (available in the American Arbitration Association Library in New York). But see
supra note 16 and accompanying text.
67. Id. "We do not think a request for arbitration outside of China is 'unfriendly.'"
Diary I, supra note 41, at 65 (remark attributed to Jen, Secretary General of F[E]TAC). But
see SPECIAL REPORT, supra note 19, at 19 (reporting that the Chinese regard insistence on
arbitration as unfriendly or evidence of bad faith).
68. Diary II, supra note 25, at 2. Thus the contention of some that the Chinese regard
insistence on arbitration as unfriendly or evidence of bad faith, SPECIAL RE'ORT, supra note
19, at 19, is perhaps only valid when a serious effort to settle through friendly negotiation or
conciliation has not been made. See also supra note 15.
69. Jen & Liu, supra note 36, at 155.
70. CODE OF ETHICS FOR ARBITRATORS IN COMMERCIAL DISPUTES (1977) (prepared by the
American Arbitration Association in conjunction with the American Bar Association).
71. Id. Canon IV, H (emphasis added). But see infra note 139 (UNCITRAL
Conciliation Rules, article 19).
generally played by FETAC. It is also possible that a corresponding
conciliatory institution of the foreign party's choice can function
with FETAC in a process called joint conciliation. 72 Joint
conciliation is not intended to supersede any existing contractual
provisions. 73 Furthermore, a failure to reach a settlement does not
constitute submission by the parties to the jurisdiction of the conciliatory
bodies for arbitration purposes. 74
Should the "friendlier" means of resolving disputes fail,
arbitration, China's procedure of last resort, 75 may be initiated. 7 The
Trade Agreement provides "recourse to arbitration for settlement in
accordance with provisions specified in their contracts or other
agreements to submit to arbitration.''77 The parties may agree on
arbitration in China, the United States, or a third country, 7 but
there is no requirement that the Chinese consent to arbitration
outside of China in any particular contract. The Trade Agreement
merely states that such an agreement is valid. Generally, the
Chinese are reluctant to agree to arbitration anywhere other than
China, 79 and some commentators contend that the likelihood of
72. Shen, supra note 58, at 3-4; Ren, supra note 5, at 9. For an account of a joint
conciliation conducted between American and Chinese parties, see infraPart III of this Note.
73. Diary II, supra note 25, at 103-04. See also Holtzmann, supra note 24, at 290.
74. Holtzmann, supra note 24, at 290.
75. See SPECIAL REPORT, supra note 19, at 15, 17, 19; Lubman, supra note 16, at 46.
"[Aletual arbitration procedure in China should not be one of the Western businessman's
prime concerns." Article, DisputeSettlement in China, 4 A.S.I.L.S. INT'L L.J. 71, 88 (1980).
But see Comment, China, Modernization, and Sino-United States Trade: Will China Submit
to Arbitration?, 10 CAL. W. INT'L L. J. 53 (1980), where the author contends, based on an
historical analysis, that China's views on arbitration are changing.
An effective arbitration clause can prevent courts from obtaining jurisdiction over a
dispute. See supra note 43.
76. Holtzmann, supra note 24, at 253. See also supra note 15.
77. Trade Agreement, supra note 11, art. VIII, para. 2.
79. Note, supra note 43, at 268. "Chinese negotiators typically will insist that
arbitration take place in Beijing." Yeow, supra note 15, at 49. The Chinese wonder why a dispute
should be settled in a third country. Diary II, supra note 25, at 49. However, they might be
willing to have some cases arbitrated in the United States or third countries in order to gain
experience with the various ways of settling disputes. Id. See also supranote 15 and
The Chinese are extremely able negotiators. See Jenkins, Dealing with the Chinese, 5
INT'L TRADE L.J. 27, 29 (
). See also Brown, supra note 9, at 35-37, for a discussion of
third-country arbitrations is minimal.80 The details of dispute
resolution remain open for negotiation on an ad hoe basis, subject to the
provisions of the contract. 8'
The Trade Agreement also emphasizes the use of the
arbitration rules of FETAC,8 2 MAC, the American Arbitration Association
(AAA), the United Nations Commission on International Trade
Law (UNCITRAL), or other internationally recognized rules.8 3
This emphasis on institutional arbitration, in view of general
Chinese practice, is likely to lead to more consistent arbitration
procedures than would use of ad hoc arbitration. This greater likelihood
of consistent procedure is to be preferred in that it "substantially
alleviates the obvious difficulties of trying to establish a more
comprehensive scheme in the arbitration clause."81 4
UNCERTAINTY AND THE PROSPECT
OF EMERGING CHINESE LAW
The Trade Agreement represents a major step forward in the
normalization of the free flow of trade between China and the
Chinese model contract terms for oil ventures in the South Yellow and South China Seas and
the Beibu Gulf. Furthermore, the dispute resolution provision is typically the last item of a
contract to be negotiated, often by an attorney who has instructions not to prevent the
consummation of the contract by disagreement as to its terms. Surrey, Trade and Economic
Relations with the People'sRepublic of China:Recent Developments, 14 INT'L LAW. 15, 19
(1980). Chinese insistence that China operate as the forum will usually result in aquiescence
by the other party. However, agreements to arbitrate in Stockholm, Sweden, under Swedish
law and procedure have been negotiated. Bosco, The Law of the People'sRepublic of China
on Joint Ventures Using Chineseand ForeignInvestment, 6 BROOKLYN J. INT'L L. 217, 235-37
(1980). See generally'Paulsson, The Role of Swedish Courts in TransnationalCommercial
Arbitration, 21 VA. J. INT'L L. 211 (1981). At least one agreement to arbitrate in Toronto,
Canada has been negotiated as well. SPECIAL REPORT, supra note 19, at 4.
80. See, e.g., Lubman, supra note 25, at 126, which reports there were no known cases
in which China was a seller where arbitration was held outside of China. In fact the
likelihood of any arbitration at all, in Beijing or elsewhere, is not great. See supra note 41 and
accompanying text which indicates the generally small number of disputes settled by such
means. But see Comment, supra note 15, at 136-40 (contending Chinese acceptance of
Western style international arbitration).
81. See Cohen, Is There Law in China?, 5 INT'L TRADE L.J. 73, 78-79 (
Chinese are strict constructionists. See supra note 38. "Failure to specify these essential points
[in an arbitration clause] may, for practical purposes, nullify the existence of the clause."
Theroux, Technology Sales to China:New Laws & Old Problems, 14 J. INT'L L. & ECON.
185, 239 (1980). See supra note 15 for a brief discussion of the need for a clearly defined
"trigger mechanism" which starts the arbitration process.
82. See Shen, supra note 58, at 5.
83. Trade Agreement, supra note 11, art. VIII, para. 2.
84. Stevenson, supra note 25, at 386, where the quoted material is used in reference to
the adoption of the United Nations Commission for International Trade Law (UNCITRAL)
United States. However, many American and other foreign
businessmen will hesitate to invest in China because of what they
perceive as a climate of legal uncertainty 5 despite China's excellent
credit rating in the world financial community 86 and China's
international reputation for fairness87 and reliability.88 Foreign investors
ordinarily have no way of knowing what substantive law will
govern international commercial transactions because most Chinese
laws and regulations remain uncodified8. 9 A comprehensive
comArbitration Rules, 31 U.N. GAOR Supp. (No. 17) at 35-50, U.N. Doc. A/31/17 (1976); the
quoted material is equally applicable to other consistent arbitration procedures.
85. See Cohen, supra note 10, at 143, 147.
86. "China's past loan repayment record had been exemplary and on the basis of this
performance, the country has an excellent credit rating in the world financial community."
Prybyla, supra note 2, at 50. "[T]he British have offered a $1.2 billion line of credit, the
Japanese . . . $2 billion ...." Clarke, supra note 9, at 99.
87. "The very few cases that have been arbitrated were reportedly conducted very
fairly." DOING BusINEss, supra note 38, at 216. "It has been reported that, as of 1960, 61 cases
involving parties from Great Britain, Switzerland, Finland, Greece, the U.A.R., India,
Ceylon, Canada and Singapore had been arbitrated-without apparent complaint of the
proceeding or the award." SPECIAL REPORT, supra note 19, at 16. See Surrey & Soble, supra
note 13, at 35, for testimony as to fairness in conducting inspections.
88. See, e.g., supra note 86. However:
China's credit history is not necessarily a reliable indicator of China's future
credit performance .... China's present borrowing plans bear little relationship to
past practice and must be examined on their own precise merits. This cannot be
done unless the Chinese authorities release fuller information than they have done so
far on their assets, liabilities, reserves and debt service ratios. If China wants to
participate in the world economic community, she should be made to understand
that continued obsessive secrecy regarding her economic performance constitutes
Prybyla, supra note 2, at 50.
This "obsessive secrecy" is not limited to China's economic performance. It extends to
many areas. Although more than 8,000 Chinese scholars, scientists, and students are in the
United States, most of whom are studying some form of technology, the 300 or so Americans
studying in China find their efforts hampered by obstacles "erected against studying in
China." Butterfield, Testing the Limits of U.S.-ChinaExchanges, N.Y. Times, Aug. 8, 1982,
at E20, col. 1. For details on Chinese technical personnel in the United States, see Green,
Chinese Techniciansin the United States, CHINA Bus. REV., Nov.-Dec. 1977, at 27, 30. The
Chinese have "a penchant for classifying most written materials as secrets .... Butterfield,
supra, at col. 3. Some local newspapers, decades-old economic data and even 16th century
maps have been so classified. Id. at col. 4. Furthermore, there has, been a ban on field
research, which suggests that American sociologists and anthropologists are little more than
spies. Id. See also N.Y. Times, June 6, 1982, at 15, col. 5, which reports the expulsion of an
American teacher on charges of stealing state secrets.
89. See, e.g., Cohen, Huang & Nee, China'sNew Joint Venture Law, in A NEW LooK
AT LECAL AsPECTS OF DOINc BuSINESS WITH CHINA 195, 205-07 (H. Holtzmann & W. Surrey
eds. 1979). For example, there are no laws protecting industrial property rights, or protecting
against expropriation, nationalization or other taking of property. Id. at 207. Despite the
preference of the Chinese for resolving disputes by informal means, contractual obligations
mercial code does not exist, 90 and despite recent efforts toward
legislation in this area,"' China's legal system remains limited
almost exclusively to the criminal area.9 2 Moreover, detailed reports
of trade arbitration or other means for dispute resolution involving
Chinese corporations are virtually unavailable,"3 and the Trade
Agreement itself contains terms that are ill-defined and subject to
more than one interpretation.9 4
are an entirely different matter. The Chinese have earned a reputation for adhering strictly to
the controlling provisions of commercial contracts. See Hudspeth, supra note 38, at 693-702
for a discussion of some Chinese laws which have been codified.
90. See generally Cohen, supra note 81, at 73, for a discussion of the recognized need for
law within contemporary China.
Reports indicate that China is in the process of drafting a commercial code, but it is
expected to be broad, thus leaving many trade questions unanswered. Hudspeth, supra note
38, at 715-17; Mathews, ChineseSeek Grasp of Western Laws, Wash. Post, Nov. 25, 1979, at
28, col. 1. Peng Zhen, Vice-Chairman of the Standing Committee, stated at a recent
National People's Congress that priority should be given to drafting a law on contracts so that
economic legislation will keep abreast of economic reform. The People'sRepublic of China,
U.S. FOREIGN BROADCASTING INFORMATION SEaVICE DAILY REP., Sept. 2, 1980, at L34. See
Kato, supra note 38, at 449. But see Foster, Codification in Post-Mao China, 30 AM. J.
COMP. L. 395, 428 (
) (indicating an abandonment of the sweeping program of national
codification proposed in 1978 in favor of more conventional Chinese law-making
mechanisms. Party leadership continues to be the real source of authority.).
91. See Cohen, supra note 81, at 76-79. See, e.g., The Law of the People's Republic of
China on Joint Ventures Using Chinese and Foreign Investment, BEIJING REV., July 20, 1979,
at 24, reprinted in 18 I.L.M. 1163 (
) [hereinafter cited as Joint Venture Law]. This law
essentially functions as an enabling act, permitting foreign businessmen to negotiate a
comprehensive agreement with the appropriate Chinese agency. Cohen, Huang & Nee, supra
note 89, at 197. For a discussion of the Joint Venture Law by a Chinese lawyer see Shen,
China's New Law on Joint Ventures Using Chinese and Foreign Investment, 34 Sw. L.J.
1183 (1981). Article 14 of the Joint Venture Law calls for the settlement of disputes through
consultation, conciliation or arbitration. See Joint Venture Law, supra, at 26; Lewis &
Ottley, China's Developing Labor Law, 59 WASH. U.L.Q. 1165 (
) (which has bearing
on joint ventures in China); New Regulations, CHINA Bus. REV., Mar.-Apr. 1981, at 49-56
(additional new regulations). See also infra note 98.
92. U.S. DEP'T OF STATE, PUB. No. 7786, BACKGROUND NOTES: CHINA, PEOPLE'S
REPUrBLIC OF 5 (
), reprinted in How TO o BuSINEsS WITH CHINA 7 (
93. Lubman, supra note 16, at 46. This inaccessibility has been confirmed by Jaqueline
A. Keith, Program Director, United States Council, International Chamber of Commerce on
January 25, 1982 and by Richard E. Lerner, Associate General Counsel, American
Arbitration Association, on January 26, 1982, both in personal communications to the author. But
see Jen & Liu, supra note 36, at 159 ("The [arbitral] award shall be made in writing .... ").
Article 30 of FETAC rules provides for a written award and an opinion explaining the basis
for the decision. Decision of the Government Administration Council of the Central People's
Government Concerning the Establishment of a Foreign Trade Arbitration Commission
within the China Council for the Promotion of International Trade (May 6, 1954), reprinted
in SPECIAL REPORT, supranote 19, at 49-51. However, the FETAC is not willing to give copies
of the award unless it has permission of the parties. Diary I, supra note 41, at 65.
94. For example, article I paragraph 3 of the Trade Agreement states: "Commercial
transactions will be effected on the basis of contracts between firms, companies and
The Chinese recognize the need to strengthen their legal
system. 9 They realize that national rules governing economic and civil
matters will promote China's program of modernization16 and help
to induce foreign investment and foreign commercial and economic
contact.9 7 The Chinese leadership has demonstrated an effort to
implement a formal system of law. 98 However, the evolution of a
legal system is difficult. 99 The development of new laws for
internations, and trading organizations of the two countries. They will be concluded on the basis of
customary internationaltradepractice and commercial considerationssuch as price, quality,
delivery and terms of payment." Trade Agreement, supra note 11, art. I, para. 3 (emphasis
This is in keeping with the Chinese policy of adopting, in the absence of a comprehensive
commercial code, customary international trade practices in dealings with foreign
enterprises. See Some Questions on Developing Economic and Technological Exchanges with
Foreign Countries, BEIJING REV., Apr. 27, 1979, at 17, 19-20 (interview with Zou Siyi,
member of the Export Bureau of the Ministry of Foreign Trade). However, "customary
international trade practices and commercial considerations" are by no means uniform
throughout the world. A number of customary Chinese trade practices conform neither to an
objective standard of customary international trade practice (to the extent that an established
standard exists), nor to customary practices of the United States. Surrey & Soble, supra note
13, at 35. In export sales contracts for example, payment for certified conforming goods
usually is to be made at final inspection. Id. The final inspection of exports generally is
specified in Chinese sales contracts to take place in China; thus the foreign importer relying
on the language "customary international trade practices" may not be aware that he bears
the risk of loss during shipment. Id. He must be careful, familiar with all the proposed
provisions of the contract, and "know the territory" if he is to negotiate the best arrangement
and the best protection from costly misunderstanding. Hammer, A PrimerforDoingBusiness
in China, N.Y. Times, Apr. 11, 1982, at F2, col. 6 (Armand Hammer is chairman of the
Occidental Petroleum Corporation). See generally id. for one businessman's approach.
95. Address by Ren Jian-xim, Director Legal Affairs Department, The China Council
for the Promotion of International Trade, Some Aspects of China's Work in Economy, Trade
and Law, at 3, given at the American Arbitration Association in New York City (Dec. 11-14,
1979) (reproduced for distribution by the AAA). "[W]e must strengthen our legal systems."
Id. See Hudspeth, supra note 38, at 715-17 for discussion of the forces compelling the
enactment of commercial statutes in China. But see Foster, supra note 90, at 428 (indicating
an abandonment of the sweeping program of national codification).
96. See Li, supra note 52, at 96, 101 n.27.
97. See Cohen, supra note 81, at 77-78.
98. Li, supra note 52, at 83-84. Work has progressed in the areas of corporations law,
civil law and civil procedure, and taxation. Id. See also supra note 91. But note that a similar
effort mounted in the mid-1950's collapsed a few years later. Li, supra note 52, at 84, 92. See
Cohen, supra note 81, at 82 for discussion of Chinese tax studies. For reprints of regulations,
laws and forms on taxation of individuals, joint ventures, and foreign enterprises, see PRIcE
WATERHOUSE INFORMATION GUIDE, DOING BUSINESS IN THE PEOPLES'REPUBLIC OF CHINA 43-90
Law schools have reopened in China. See Diary I, supra note 41, at 44. In 1979 the
graduating class at Beijing University Law School had eighty students. Cohen, supra note 81,
99. See V. Li, LAW WITHOUT LAwyas 20-31 (1978).
tional trade will be based on their utility in implementing Chinese
policy'00 according to three principles:
1) the policy of independence and of keeping the initiative in
Chinese hands; 101
2) the policy of mutuality and equal benefits; 102 and
3) the policy of taking international practice into
"[T]o formulate the practices of a particular moment into
codes of law might imbue them with a greater sense of permanency
than they ought to have.' 0 4 Social and economic conditions in
China are changing at a pace that requires reciprocal development
of the rules to be applied. 0 5 "First we [the Chinese] must deal with
cases and then sum up experience. Only in this way can we codify
The prospect of an emerging commercial code offers little
assurance to the American businessman or lawyer who is made
uncomfortable by the uncertainties of trade, particularly in the face
of an unfamiliar dispute resolution mechanism about which
practi100. Buxbaum, Continuity and Change in China'sLegal Theory and PracticeAffecting
Importingand OtherAspects of Foreign Trade, in A NEW LOOK AT LEGAL AsPECTS OF DOING
BUSINESS WITH CHINA 437, 443 (H. Holtzmann & W. Surrey eds. 1979). See infra note 105
and accompanying text.
Western trading partners should . . . bear in mind that people from many states
with less sophisticated legal systems than the Western model, have found the
Chinese arbitration system very much to their liking. After all, there is no merit in
sophistication for its own sake. I am sure that many here will welcome a legal
system which ensures that the chances of their success do not depend too heavily on
the amount of legal fees they are prepared to invest in their claim. Instead, a
do-ityourself kit like the Chinese system may not be such a bad thing. (Coming from a
practising lawyer, the last statement has certainly been unbiased and disinterested!)
In view of the popularity the Chinese system is at present enjoying internationally, it
would be foolish to expect it to be drastically changed to suit the tastes of a few.
cally nothing, other than hearsay reports, is available. Despite the
Chinese reputation for fairness and good faith dealing, the material
on the mechanism in action can be looked upon as neutral at best.
Alternatively, it can be looked upon as a deliberate move on the
part of the Chinese to exclude examination of their mechanism by
Undoubtedly, the study of experience is the means to
knowledge and understanding. Unfortunately, American and foreign
businessmen have little to study in the way of Chinese commercial
law in general, or the Chinese dispute resolution mechanism in
particular. A policy of confidentiality does not allow it.
III. THE IMPORTANCE OF CONCILIATION
IN CHINESE DISPUTE SETTLEMENT
A. The CurrentRole of Conciliation
Conciliation as a means of dispute settlement in China has
continuing vitality. 10 8 The Chinese still regard arbitration with
107. See supra note 88 for a perspective on China's "obsessive secrecy." However, the
confidentiality of private dispute settlement mechanisms is what makes them preferred by
Western businessmen. See notes 20-25 and accompanying text.
108. The Chinese favor conciliation as a settlement technique. Reynolds, The Joint
Venture Law of the People's Republic of China: Preliminary Observations, 14 INT'L LAW.
31, 42 (1980); Yeow, supra note 15, at 51. See Lubman, supra note 16, at 45 for discussion of
the Chinese preference for "amicable negotiation" and hostility toward third-party
participation in dispute settlement. Even in the context of criminal trials, the Chinese policy of
settlement by conciliation is in evidence. See Allen & Palay, supra note 17, at 47. But see
Pattison, supra note 17, at 136 (contending that Chinese predilection for conciliation has
Conciliation has been recognized by the United Nations as a viable means of settling
international disputes. UNCITRAL Conciliation Rules have been unanimously adopted by
that agency. Report of the United Nations Commission on International Trade Law, 35 U.N.
GAOR Supp. (No. 17) at 32, U.N. Doe. A/35/17 (1980) [hereinafter cited as UNCITRAL
Conciliation Report]. Representatives of both China and the United States were members of
the Drafting Party. Id. at 11. See id. at 33-38 for the text of the adopted Rules. Article 1
provides that these Rules are applicable by agreement of the parties, and that the parties may
modify the Rules at any time. Id. at 33.
Article 17 provides that unless otherwise agreed, costs are to be borne equally by the
parties. Id. at 37. These costs do not include expenses of the parties themselves but do include
the expenses of conciliator(s), witnesses, experts, conciliation fees, etc. Id. This can be
important to an American party who travels to China to partake in joint conciliation. It may
motivate both parties to reach a quick settlement as expenses mount. Furthermore, as
provided by article 18 the conciliator(s) (and this presumably could include an American
joint conciliator) may request each party to deposit equal amounts in advance for these costs.
distrust, to be conducted only as a last resort.109 "If they could, the
Chinese would perhaps dispense with dispute settlement clauses in
their contracts altogether."' 10 In a survey of twenty-nine United
States-China trade contracts, three had no such clauses, and the
remaining twenty-six called for the settling of differences through
conciliation."' At least five disputes in United States-China trade
have been resolved successfully through conciliation.1 2 While
official reports detailing the actual settlements would be illustrative,
formal records are unavailable." 3 However, some unofficial
observations of a joint conciliation conducted in 1977 may help the
Western reader to understand the nature of the Chinese
conciliation process. '4
109. Yeow, supra note 15, at 48. The great majority of disputes between the Chinese
themselves are settled by informal means. See Allen & Palay, supra note 17, at 48, reporting
4,382 settlements before trial out of 6,132 cases examined by the economic courts. See
generally supra notes 15, 36, 37, 68, 75 and accompanying text.
110. Yeow, supra note 15, at 48.
111. Id. at 48-49.
Given their dislike of adversary proceedings, it is not surprising that the
Chinese seldom resort to arbitration. The few instances of arbitration with Western
companies have all taken place in Beijing, according to Chinese sources.
Yet US lawyers involved in China trade insist that the arbitration clause is an
indispensible part of any contract. . . . [Tihe Chinese will include arbitration
clauses in order to meet the needs of their trading partners. But there is considerable
variety in the types of clauses agreed to.
At one extreme the language is so vague as to be almost meaningless.
Id. at 49. See Note, supranote 43, at 260 which suggests that arbitration clauses are included
in contracts by the Chinese in order to avoid jurisdiction of foreign courts. But see Comment,
supra note 15 (commentary purporting China's acceptance of "Western-style" international
arbitration). See generally supra note 15.
112. Yeow, supra note 15, at 51.
113. See supra note 93 and accompanying text. Some unofficial reports of case examples
do exist, see, e.g., SPECIAL REPORT, supra note 19, at 21-38, but they are relatively
114. The following material is drawn from an unpublished diary of Donald B. Straus,
Diary II, supra note 25. This joint conciliation was the result of almost three years of
constructive discussions between the AAA and CCPIT. Id. at 25. Aspects of this 1977 joint
conciliation, other than those discussed in this Note, have been reported, most notably in
Holtzmann, supra note 24, at 299. The unavailability of more current material is primarily a
result of the desire of the parties to maintain the confidentiality of their business
arrangements, and this is particularly true in light of the Chinese emphasis on the importance of
continuing business relations. Personal communication by Donald B. Straus to the author of
this Note. See supra notes 20-25, 65 and accompanying text (general discussion of the
preferred position of confidential arrangements). See infra note 137 (brief discussion of
reference to this joint conciliation made in later years),
Joint conciliation is compatible with article 3 of the UNCITRAL Conciliation Rules,
which provides that the parties may agree that there shall be two conciliators. UNCITRAL
B. A Case Study
The dispute arose in a multimillion dollar transaction between
an American seller of commodities and a Chinese buyer.
Representatives of the AAA and the Chinese FETAC conducted a successful
joint conciliation in China to the satisfaction of the parties.
The contract between the parties required that the product in
question be delivered at United States ports by the American seller
to the Chinese buyer who would transport the product in ships of its
own designation. The seller was unable to meet the delivery date
originally agreed upon and requested a revised delivery schedule.
The Chinese buyer responded with a new schedule. Subsequently
the price of the product dropped sharply; the Chinese buyer failed
to meet its revised pick-up schedule. The product was finally
shipped to China after long delays that the American seller claimed
cost several million dollars in storage and interest charges (carrying
charges) which it was entitled to recover under a provision in the
contract." 5 The seller requested that a joint conciliation be initiated
Conciliation Report, supra note 108, at 33. In an earlier draft, article 2 concerned the
number of conciliators and provided that "[t]here shall be one conciliator unless the parties
have agreed that there shall be three conciliators." Report of the United Nations Commission
on International Trade Law, 34 U.N. GAOR Supp. (No. 17), at 39, U.N. Doe. A/34/17
). However, it was the view of the Commission on International Trade Law
(Commission) that the use of two conciliators was not uncommon and that an odd number was not
essential because the role of the conciliator(s) was to make recommendations, not decisions.
Id. In an intermediate draft, article 3 provided: "There shall be one conciliator unless the
parties have agreed that there shall be two or three conciliators." UNCITRAL Conciliation
Report, supra note 108, at 15.
The United Nations Commission on International Trade Law addressed the question
whether multiple conciliators would have to act jointly or could act individually as well. Id.
The Commission's view was that conciliators should act jointly, id., and article 3 of the
UNCITRAL Conciliation Rules now provides: "There shall be one conciliator unless the
parties agree that there shall be two or three conciliators. Where there is more than one
conciliator, they ought, as a general rule, to act jointly." Id. at 33. Article 4(
"In conciliation proceedings with two conciliators, each party appoints one conciliator
... " Article 4(
) emphasizes the importance of appointing impartial and independent
conciliators. Id. at 34. In the appointment of one or three conciliators article 4(
that "the advisability of appointing a conciliator of a nationality other than the nationalities
of the parties" be taken into account. Id. Thus, the spirit of joint conciliation and the above
articles are in accord.
115. The written contract specified a carrying charge to be paid by the buyer for delays
caused by the buyer. Diary II, supra note 25, at 11. It was noted during the conciliatory
process that the provision for a carrying charge was really meant to protect the buyer because
with such a provision the seller could not cancel the contract if the buyer's ship arrived later
than specified. Id. at 37. ("Apparently 40 % of all deliveries in the commodity trade are late."
to help find a friendly solution to the problems that had arisen
between the seller and the Chinese buyer.
The buyer's position was that the difficulties all stemmed from
the seller's inability to deliver according to the original schedule. 1 "'
The buyer calculated that it justifiably could have cancelled the
contract to protect its own interest; under the principles of equality
and mutual benefit, it did not." 7 However, the Chinese buyer
offered little or no evidence to support its counterclaim for
The Chinese conciliators suggested that the American seller
had no valid claim and should look to future trade" 9 because,
eventually, each side would benefit from growing trade. 20 This
solution was rejected.' 2' The seller wished to negotiate on the case
After repeated attempts to reach a mutual understanding, a
settlement was reached, consisting of a payment of more than one
million dollars by the buyer. 23 The Chinese stressed that they
admitted no liability but agreed to the settlement in the spirit of
116. Diary II, supra note 25, at 34.
117. Id. at 35.
118. The Chinese party asserted that it made no claim on these losses in the name of
friendship, and thus, because no claim was made, supporting evidence was unnecessary. Id.
The American party documented its loss with a 45 page brief supported by 14 exhibits.
The exhibits included: (
)-the contract; (
) a full set of correspondence between the parties;
(3) statistical tables; (4) computer printouts of relevant figures; (
) copies of invoices; (6)
affidavits by experienced individuals not connected with the transaction to attest to
customary trade practices; and (7) copies of United States, British, Swiss and Philippine statutes to
demonstrate prevailing international legal principles. Holtzmann, supra note 24, at 299-300
(in reference to this same joint conciliation). According to the Chinese approach, the
principle of conciliation requires that the search for facts and documentary evidence be limited
only to the "essential facts," but the meaning of "essential facts" was never satisfactorily
conveyed. Diary II, supra note 25, at 5-6.
Article 5(3) of the UNCITRAL Conciliation Rules provides: "At any stage of the
conciliation proceedings the conciliator[(s)] may request a party to submit to him such additional
information as he deems appropriate." UNCITRAL Conciliation Report, supra note 108, at
34. These Rules should alleviate the problem of inadequate information upon which to base a
recommendation. Article 11 provides that the parties co-operate with the conciliator(s) in
good faith and endeavor to comply with requests for written materials and evidence. Id. at
119. Diary II, supra note 25, at 51, 71, 77.
120. Id. at 71.
121. See id. at 51.
122. Id. at 76.
123. Id. at 100.
friendship. 124 The Chinese insisted that signing the settlement
agreement was unnecessary, 2 5 and that the agreement would be
The key to the American party's right to recovery was a
controlling contractual provision that ascertained in advance the legal
rules that would apply. Legal rights can be preserved by
comprehensive and detailed contracts that cover all conceivable
possibilities, exigent or not. However, aside from the extreme
impracticability of such an approach with even the most cooperative party,
negotiating the terms of choice with the Chinese will be difficult. 27
While the penchant of American lawyers to provide in the contract
against every conceivable eventuality is perhaps the most extreme
in the world, 2 8 the Chinese practice of legal informalism,
particularly of avoiding written commitment on their part, 29 is equally
extreme. Furthermore, "insistence on highly formal and abstract
solutions [on the part of American negotiators] .... might call
into question [for the Chinese] the neutrality of the rules
124. Id. at 101.
125. Diary II, supra note 25, at 108. Article 13(
) of the UNCITRAL Conciliation Rules
requires that if the parties reach a settlement agreement, it be signed by the parties, and
article 13(3) makes such a signed agreement binding. UNCITRAL Conciliation Report, supra
note 108, at 36.
127. In this case the controlling provision was included as protection for the buyer. See
supra note 115. A recent study of a number of contracts revealed that the terms were
decidedly in favor of the Chinese party. G. HsIAo, supra note 41, at 143-52. See Brown,
supra note 9, for a discussion of Chinese model contract terms. See also supra notes 77-81 and
It is important to remember that negotiating climates may vary not only because of
changing international relations but also because of changing domestic policy. See Jenkins,
supra note 79, at 29. For a discussion of the negotiation of an international agreement see
Verbit, Negotiating with China: A Minor Episode in CHINA'S PRACTICE OF INTERNATIONAL
LAW 154-66 (J. Cohen, ed. 1972).
128. See Remarks of Bertholt Goldman, ICC Forum: International Commercial
Arbitration (Apr. 4, 1978):
The tendency of American lawyers to want to provide in the contract against
every conceivable eventuality is the subject of some amusement on the part of some
of their colleagues in other countries. During the course of a recent seminar in Paris
on ICC arbitration, a French lawyer recounted to the general mirth of his audience
his experience with an American counterpart who wished to "improve" the standard
ICC clause by adding "or its successor" after "International Chamber of
Reprinted in Stevenson, supra note 25, at 401 n.110.
129. See, e.g., supra note 38 and accompanying text.
urged .... ,,130 However, this is not to say that United States
negotiators should not be firm on points of economic significance.
Persistence, composure, patience, 131 and perhaps a bit of insouciance
can sometimes turn even a "non-negotiable" issue into one that is
This successful resolution of a dispute through joint
conciliation, while a simplified account of a complex settlement, is
nevertheless instructive. It illustrates the paramount principle that
agreements and stipulations of the parties to a contract must be
observed 133-despite the Chinese insistence that the American seller
had no valid claim. It also illustrates the Chinese preference for
looking to future trade as a way to settle current disputes, 34 as well
as the Chinese penchant for informality in their legal approach. 135
Furthermore, the fact that the awarded sum was approximately
half the amount sought may be indicative of the Chinese readiness
to compromise. 13
Despite the apparent success of this joint conciliation in
reaching a settlement, no further joint conciliations have been conducted
by the AAA and FETAC. 137 This may indicate a dissatisfaction on
130. Lubman, supra note 16, at 9. The Chinese have been skeptical of the attorney's
role in negotiating business arrangements. Jenkins, Implications of Recent Agreements for
United States-China Trade, 14 INT'L LAW. 5, 5 (1980). However, this attitude is changing,
due in part to the growing importance of attorneys within China itself. Lawyers representing
American firms will play an important role as negotiators of commercial contracts.
Hudspeth, supra note 38, at 735-40.
131. Contracts with the Chinese do not materialize overnight. Occidental's coal deal
took two and one half years of give-and-take negotiations before an agreement was reached.
Hammer, supra note 94, at F2, col. 3. A co-production contract between the Chinese and
Avon Products Inc. was signed after a year and a half of negotiations. Wren, Peking Factory
Making Avon Creamfor Chinese, N.Y. Times, Sept. 23, 1982, at Dl, col. 5.
132. Jenkins, supra note 79, at 31-32.
133. Pacta sunt servanda. BLACK's LAW DICIONARY 999 (5th ed. 1979). See H. KIM,
supra note 25, at 94.
134. See supra note 55 and accompanying text.
135. See supra note 38 and accompanying text (the Chinese insisted that signing an
agreement of settlement was an unnecessary formality).
136. See supra note 25 for materials on compromise. In the West parties often receive in
settlement considerably less than the amount to which they feel they have a right, and this is
not considered a compromise.
137. Personal communication to the author of this Note by Donald B. Straus, former
President of the American Arbitration Association. Confirmed by Michael Hoellering,
General Counsel of the American Arbitration Association in a telephone conversation with the
author of this Note on September 22, 1982 [hereinafter cited as Hoellering conversation].
Reference in Ren, supra note 5, at 9, to two joint conciliations conducted in 1978-79 by a
branch of the CCPIT and the AAA is said to be in error as to the date. Hoellering
conversathe part of the Chinese with the joint conciliation process, at least
in this instance. 138 In effect, the conciliatory bodies acted as
advocates for the entities of their own nations. 139 The Chinese, in pursuit
of Chinese control of the dispute settlement process,1 40 may consider
the AAA's role to have been overly assertive and a derogation from
The likelihood of growing trade between the United States and
China gives increasing importance to the Trade Agreement
between these two nations and to its dispute resolution procedures.
tion, supra. The second joint conciliation referred to was settled almost immediately after
initiation, before joint conciliation took place. Id. See Diary II, supra note 25, at 4.
138. An agreement to settle disputes arising from trade with a French entity was signed
in 1980. Ren, supra note 5, at 9.
139. See Diary II, supra note 25, at 52, 76, 77 for examples. Permission to publish these
statements made in the heat of negotiation has understandably been denied by Mr. Straus.
Ideally, joint conciliators should be impartial and should act jointly. See supranote 114.
The likelihood of partiality is diminished when a conciliator is appointed by each of the
parties to a dispute as compared to the appointment of only a Chinese (or for that matter only
an American) conciliator. Another possibility that would tend to maintain impartiality is the
appointment of a single or third conciliator who is neither Chinese nor American.
Article 19 provides that in subsequent proceedings the conciliator(s) not act as
arbitrator, representative, counsel, or witness of a party. Id. at 38. This provision can be
particularly important should American and Chinese parties to a dispute fail to reach a settlement
through conciliation in the case where arbitration in China is the next stage in the settlement
140. The policy of independence and keeping the initiative in Chinese hands is a
principle of great importance to the Chinese. Jen & Liu, supra note 36, at 153-54. Modern
international law is essentially a creation of the West. 1 J. COHEN & H. CHIU, PEOPLE'S
CHINA AND INTERNATIONAL LAW 3 (1974). The Chinese distrust of using international law to
define relations with the West, see Li, supranote 33, at 235-36 (indicating Chinese
unwillingness to entrust dispute resolution to international bodies), is founded in substantial part on
unfortunate experiences of prior dealings with the West. Chinese economic history is marked
by foreign exploitation and humiliation. 1 J. COHEN & H. CHIu, supra at 6. See generally,
e.g., A. WALEY, THE OPIUM WAR THROUGH CHINESE EYES (1958) (account of China's
unsuccessful attempt to prevent British traders from smuggling opium into China). In the past,
international law was manipulated by Western powers and Japan to victimize and exploit
China. 1 J. COHEN & H. CHIU, supra at 9. In more recent years, the Western, and
particularly the United States, attitude toward China has been marked by open hostility and
opposition. See generally Lee & McCobb, United States Trade Embargo on China,
19491970: Legal Status and Future Prospects, 4 N.Y.U. J. INT'L L. & POL. 1 (1971). Although
there have been significant shifts in China's attitude toward the West in recent years "the
lingering association between foreign trade and foreign exploitation remains.
..L.ubman, supra note 16, at 11. But see Comment, supra note 15, at 137 (attesting to China's
acceptance of "Western-style" international arbitration).
When a dispute cannot be resolved by the parties themselves, the
participation of an objective third party can help the disputants
view the matter as part of a continuing business relationship that is
in their mutual interests. Conciliation, unlike arbitration or
litigation, is a system that allows parties to voluntarily adopt a
settlement. The Chinese will continue to prefer conciliation, their
traditional means of dispute resolution, although they may experiment
with arbitration and court systems in order to appease their foreign
Joint conciliation, a method not explicitly mentioned in article
VIII, has been successfully conducted in China by representatives
of the American Arbitration Association and the Chinese FETAC,
and evidences the flexibility of the Chinese system. It further
manifests the need for flexibility by Americans doing business in China.
The Chinese will continue to assert control over the dispute
resolution procedure in whatever form it takes. Foreign parties will
want to protect their interests by requesting a provision in the
contract requiring joint conciliation should a dispute arise. This is
especially true for American businessmen who will feel more secure
utilizing this form of dispute resolution. Joint conciliation between
American and Chinese parties can take on an adversarial nature
because in effect the AAA and FETAC may represent the party of
their nation. The American is more comfortable because the
settlement process is analogous to being in court; yet, the mechanism is
an informal one and trade relations remain friendly. 14' However,
the Chinese consider participation, indeed, perhaps even
observation, by foreign third parties as encroaching on Chinese control.
Negotiating such terms into the contract, therefore, will require
concessions by the foreign parties in other areas. The Chinese
would prefer to eliminate dispute settlement provisions entirely.
Chinese determination to control Chinese destiny is evidenced by contract terms, see,
e.g., Brown, supra note 9, at 34, and the requirements that foreign litigants, and perhaps
parties to arbitration proceedings, have Chinese lawyers, if any; yet Chinese lawyers
represent "facts," not clients. See supra notes 15, 17. Unfortunately, part of the Chinese
determination to maintain control manifests itself in an attitude of secrecy toward the West. See
supra note 88.
141. See supra note 65 and accompanying text. However, one author suggests that
because of the risk of nationalization, investors should seek high short-term returns on their
capital. See Kato, supra note 38, at 455.
It is important for the Chinese to understand that American
investors and traders will be hesitant to commit capital to a venture
in China if they lack confidence that their investment will be legally
protected should a dispute arise with their Chinese business
associates. Accustomed to Western legal practices, American
businessmen will want to know in advance and in definite terms what their
rights and obligations will be under the law. Those who invest at all
will do so on terms that take into account the perceived risk that
uncertainty creates. Joint conciliation will minimize the perceived
risk-and that will increase the attractiveness of doing business in
AND FERTILITY PLANNING TECHNOLOGIES: THE NEXT 20 YEARS 200 ( 1982 ) ; see also China, Pop .
1 , 008 , 175 ,288: One-Fourthof the World, N.Y. Times, Oct. 28 , 1982 , at Al, col. 5; Wren,
China Counts Its Quarter of the World's Noses, N.Y. Times, July 6 , 1982 , at Al, col. 4;
Nixon , 10 Years After the Visit to China, N.Y. Times, Feb. 28 , 1982 , at E19, col. 1 . 2. See The New Era in East Asia: HearingsBefore the Subcomm . on Asian and Pacific
Affairs of the House Comm. on ForeignAffairs, 97th Cong., 1st Sess . 235 ( 1981 ) (statement
People's Republic of China, discusses the present reality in China today: 1. the per capita gross national product of China is on the order of $400-450 but very likely less; 2. the average yearly industrial wage (modern industry) is approximately 11 . Agreement on Trade Relations, July 7 , 1979 , United States-People's Republic of
China , 31 U.S.T. 4651, T.I.A.S. No. 9630 [hereinafter cited as Trade Agreement] . Until May , 1979 , the free flow of trade between the United States and China was
the Agreement Concerning the Settlement of Claims, May 11 , 1979 , United States-People's
Republic of China , 30 U.S.T. 1957 , T.I.A.S. No . 9306 . See Comment , The Blocked Chinese
Assets- United States Claims Problem: The Lump-Sum Settlement Solution, 3 FORDHAM 16. Lubman , Trade Between the United States and the People's Republic of China:
Practice ,Policy, and Law, 8 LAW & POL'Y INT'L Bus . 1 , 45 ( 1976 ). See Yeow, supra note 15 , 20 . Aksen, Dispute Settlement Under U.S.-China TradeAgreement , N.Y.L.J. , Aug . 9 ,
1979, at 1, col. 1. Agreements with Romania and Hungary, for example, contain provisions in which the
actions. Section 2 of article VIII of the April 2, 1975 Trade Agreement with Romania
provides: The Parties encourage the adoption of arbitrationfor the settlement of disputes arisingout of internationalcommercial transactionsconcluded between firms, companies and economic organizations of the United States of America and those of the Socialist Republic of Romania. Such arbitration should be provided for by provisions in contracts between such firms, companies and economic organizations, or in separate agreements between them in writing executed in the form required for such contracts. Such agreements (a) should provide for arbitration under the rules of arbitration of the International Chamber of Commerce in Paris; and (b) should specify as the place of arbitration a place in a country other than the United States of America or the Socialist Republic of Romania that is a party to the Convention for the Recognition and Enforcement of Foreign Arbitral Awards of New York on June 10, 1958 ; however, firms, companies and economic organizations party to a contract may agree upon any other form or place of arbitration.
Agreement on Trade Relations, Apr. 2 , 1975 , United States-Romania , 26 U.S.T. 2305 ,
T.I.A.S. No. 8159 (emphasis added) (footnote omitted) . Article VIII of the March 17 , 1978 Trade Agreement with Hungary provides: 1. The Parties encourage the prompt and equitable settlement of commercial disputes between their firms, enterprises and companies. 2. Both Parties endorse the adoption of arbitration for the settlement of such disputes not otherwise amicably resolved. The Parties encourage their respective firms, enterprisesand companies to provide in their contractsfor arbitrationunder internationallyrecognizedarbitrationrules. Such agreements may specify a place of arbitration in a country other than the Hungarian People's Republic or the United States of America that is a Party to the 1958 Convention for the Recognition and Enforcement of Foreign Arbitral Awards . Parties to the contract may provide for any other place or rules of arbitration.
Agreement on Trade Relations, Mar. 17 , 1978 , United States-Hungary , 29 U.S.T. 2711 ,
T.I.A.S. No. 8967 (emphasis added) . 21 . Holtzmann , Arbitrationin East-West Trade , 9 INT'L LAW . 77 , 77 ( 1975 ). In fact,
No. ECE /TRADE/117, at 30, U.N. Sales No . E.73 . II .E. 13 ( 1973 ). 22 . Arbitration may be defined as a voluntary agreement by parties to a contract that
supra note 23 , at 216. "[T]he extent of an arbitrator's obligation to explain his award is
necessarily related to the scope of judicial review of it." Sobel v . Hertz, Warner & Co., 469
F. 2d 1211 , 1214 ( 2d Cir . 1972 ). See generally Sweeney , JudicialReview of Arbitral Proceed-
ings , 5 FORDHAM INT'L L.J . 253 ( 1982 ). Foreign investors have voiced concern about the tendency to issue compromise awards of
International Chamber of Commerce (ICC) arbitrators , Stevenson, supra, at 390, as well as
PracticalAspects of Trade with the People'sRepublic of China, 1973 PRiv . INV. ABROAD 111,
141. See also, e.g., Diary kept by Donald B . Straus , President of Research Institute of the
American Arbitration Association, of Second Trip to People's Republic of China, October 9-
23, 1977 , at 58 ( unpublished) (available at the AAA Library in New York with Mr . Straus'
CONCEPTS OF CHINA AND THE WEST 118 ( 1981 ). Wilfred Feinberg, Chief Judge of the United States Court of Appeals for the Second
Feinberg , Maritime Arbitration and the Federal Courts, 5 FORDHAM INT'L L.J . 245 , 248
( 1982 ). The risk of judicial vacation of an arbitral award is minimized when an award
opinion is not published . Id. at 249 . 26. Aksen, supra note 20, at 1, col. 1 . 27. Trade Agreement, supra note 11 , art . VIII, para. 1 ("friendly consultations, concili-
ation") . 28 . Aksen, supra note 20, at 1, col. 1 . 29. Trade Agreement, supranote 11 , art . VIII, para. 1 ("or other mutually acceptable
dling. Ren, supra note 5, at 9. An agreement to use joint conciliation for dispute settlement
was reached in 1980 between the Bureau of Industrial Property of France and the China
Part III of this Note for a detailed account. 30. See Trade Agreement, supra note 11, art . VIII, para. 1. 31. Id. para. 2 . 51. It should be noted that the use of extensive formal legal briefs is not part of the
Chinese approach . See,e.g., id. at 299-300 . 52 . Li , Reflections on the Current Drive Toward Greater Legislation in China , in A
NEW LOOK AT LEGAL AsPECrs OF DOING BuSINESS WITH CHINA , 81 , 87 (H. Holtzmann & W.
Surrey eds. 1979 ). "You do not do business again with a partner who has sued you in the
Disputes , 22 VAND. L. REv. 503 , 512 ( 1969 ) (statement attributed to Chinese General
Chamber of Commerce trade representative) . 53 . Li , supra note 52, at 85. 54. Id. at 86 . 55. See Diary II , supra note 25, at 77 . 56. For example, if a settlement is reached whereby the injured party will receive a ten
purchase in order to take advantage of the discount . 57. Holtzmann, supra note 24, at 249 . 58. To indicate the broadened scope of disputes of which it will take cognizance, the
Trade Arbitration Commission (FETAC) in February , 1980 . Excerpt from speech by Shen
ing (Nov. 12 , 1981 ) at 5. This Note uses the term FETAC. 59. Holtzmann, supra note 24 , at 249. FTAC was established in 1956, and MAC , in 1958 . Disputes arising from contracts and