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Case Analysis of Settlement of Transnational Debt Chain

 

 Subject: whenever mentioned “Debt Chain”, people always recall the economic transition period in early 1990s, during which period, the economic development of China was seriously affected due to the default in payment widely existed among enterprises. And thus, the State Council established workgroup to solve such debt chains and invested a large amount of initial fund, such problem was gradually solved. Mutual financing and payment for others are inevitable among enterprises being engaged in international investment and trade. Thus, Commercial Mediation Institute and mediators shall focus on the method adopted in solving such debit dispute. This case, which adopted the method of mediation and effectively solved such dispute through using the platform of mediation-to-arbitration, has significant analysis significance.

Issue of Case: Debt and payment for others among these enterprises in three nations

Applicant: certain enterprise from British Virgin Islands

First respondent: certain Group in China

Second respondent: certain Group in India

 Case brief

At the beginning of Year 2007, Second respondent purchased $2 million raw materials from the first respondent and payment shall be made within 12 months after the delivery. Due to the influence of such financial crisis, the second applicant fails to make such payment in due, which affect the implementation of other contracts between first respondent and others.

As the controlling shareholder of second respondent, applicant signed an Agreement (hereinafter referred to as “agreement”) with the two respondents in October 2008, for the purposes of appropriately solving the debt between the two respondents and maintaining the cooperation relationship between them. It is agreed that: applicant shall make payment of $2 million to the first respondent for the second respondent (hereinafter referred to as “disbursement”) on December 1, 2008; the second respondent shall return such disbursement to applicant before May 1, 2010; if the second respondent failed to return the disbursement within such period, the first respondent shall return such disbursement back to the applicant.

 Applicant made such disbursement under the agreement, the first applicant continued to perform other contracts with the second respondent. In April 2010, the second respondent intended to return such disbursement back to applicant. However, Indian Foreign Exchange Administration Department refused to approve the application for returning such disbursement back to applicant due to the lack of transaction basis between the second respondent and applicant. Applicant and the second respondent used to negotiate with the first respondent, requiring him to return the disbursement of applicant in advance, and then the second respondent will make payment to the first respondent. But, the first respondent was afraid that the second respondent won’t make such payment when he returned such disbursement, thus he might assume huge risk. Meanwhile, after consulting to China Foreign Exchange Administration Department, such method will conflict with the foreign exchange management system; as a result, the disbursement made by applicant could not be recovered. And no progress ever achieved after many times of negotiations, thus, applicant had no other option but to initiate arbitration to China International Economic and Trade Arbitration Commission (hereinafter referred to as “CIETAC”) against the two respondents under the arbitration provisions of this agreement.

The Process of Acceptance for Mediation

The applicant consulted lawyers from Beijing Jingze Law Firm. And after hearing the details of such case and reviewing all relevant files, the attorney believed that: three parties had no dispute on such debt, disbursement and the return of such disbursement, but disagreed with the sequence of such return, the avoidance of risk existed and whether the foreign exchange administration department in applicant’s country will approve such return. Although applicant is entitled to commence such arbitration and such arbitration request shall be accepted by the arbitral tribunal, the applicant needs to spend a lot of money on arbitration fees, besides that, such arbitration procedure will be postponed in case that no consensus reached on the appointment of the arbitrators due to the fact that two respondents are involved. Even if the two respondents will implement such adjudication, the settlement of such dispute will be delayed for 6 months. Thus, it is suggested that if applicant can reach an accommodation with the two respondents, and CIETAC makes adjudication on the Reconciliation Agreement signed by three parties through the method of mediation-to-arbitration, then, not only the approval barriers of the foreign exchange departments of China and India can be avoided, but also the doubts of three parties on the disputes caused by the nonperformance of one party can be eliminated.

Applicant accepted the attorney’s suggestion, and proposed the solution mentioned above to the two respondents. The two respondents accepted such proposal with pleasure and jointly entrusted the lawyers in such Law Firm as common agents of the three parties to coordinate such case according to the Reconciliation Agreement affirmed by the arbitral tribunal.

Lawyers undertaking such case had no objection on intermediary mediation, the avoidance of burdens of arbitrations and the achievement of reconciliation. However, it is stipulated in Article 28 of : “the same law firm cannot represent both parties involved in the same litigation case……“, and if three parties reached such Reconciliation Agreement, whether the same law firm representing three parties involved in this case violates such stipulations is in doubt. After repeatedly analysis, this firm realized that: if three parties can apply to CIETAC for confirmation of such reconciliation agreement, three parties shall become the common applicant or be deemed as one party. These three parties are named as applicant and respondents due to the requirements of arbitration rules. Therefore, being the common agent of these three parties does not violate the stipulations of Standards on Lawyers’ Professional Ethics and Practice Disciplines. Lawyers undertaking such case signed Power of Attorney with these three parties after obtaining the approval of the regulatory agency of lawyers and sufficient disclosure to these three parties, and the scope of authority includes: mediation of three parties’ disputes, witness of the reconciliation agreement concluded by these three parties, acting as the common agent of these three parties and applying to CIETAC for confirmation of such Reconciliation Agreement.

 

 The Process of Mediation

After acceptance of entrustment, the law firm appointed attorneys with qualifications of mediators in Mediation Center of CCOIC and CIETAC, organized face-to-face meetings for three times and teleconferences for four times. And the following Reconciliation Agreement was reached on July 9, 2010 by these three parties:

1. First respondent shall return $2 million back to applicant and transferred such disbursements to the bank account designated by applicant before August 25, 2010. Remittance charge shall be assumed by the first respondent.

2. Second respondent shall return $ 2 million back to the first respondent and transfer such disbursement back to the bank account designated by first applicant. Remittance charge shall be assumed by the second respondent.

3. After completing the obligations under item 1 and 2 specified above in due time, the rights, obligations and disputes occurred among applicant, first respondent and second respondent due to such debts and disbursements are terminated from now on. In case that any party violates the payment obligations stipulated in Items 1 and 2, such party shall make payment of 5‰ of accrued payables as the liquidated damages for each day.

 With the purpose of enhancing the binding forces of such Reconciliation Agreement, each party agrees that the applicant shall submit such Reconciliation Agreement to CIETAC established in Beijing, and jointly appoint Wang XX, an expert of arbitration and mediation in the Register of Arbitrators, as the sole arbitrator to establish the Arbitral Tribunal and make the adjudication according to such Reconciliation Agreement. The Arbitral Tribunal may carry out the written hearing through appropriate procedures and make adjudication in rapid way, and such procedure and period are not limited by other provisions under such arbitration rules. Such adjudication shall be final and binding all parties.

 The Progress and Results of Arbitration

CIETAC accepted this case on July 22, 2010, and organized an arbitral tribunal on August 2, 2010. The Secretarial Bureau of CIETAC made the following adjudication after sending arbitration documents and examining Reconciliation Agreement, payment document of disbursement issued by bank and No Comment Letter relating to the identity of agent practiced in the same law firm jointly issued by three Parties.

. Case Brief (omitted)

. Suggestion of Arbitral Tribunal (Main Content)

1. Views on the Reconciliation Agreement involved in this case

Arbitral Tribunal noticed that applicant submitted the Reconciliation Agreement concluded on July9, 2010 in the application materials for arbitration. And both two respondents clearly indicated their approvals to such Reconciliation and its content in their comment letters submitted on August 6, 2010 and August 9, 2010, respectively, and consented to the adjudication made by Arbitral Tribunal according to such Reconciliation Agreement.

The full text of Reconciliation Agreement concluded on July 9, 2010 referred by the Arbitral Tribunal is as follows: (omitted)

2. Views on the validity of such Reconciliation Agreement

Whereas, the Reconciliation Agreement was properly and voluntarily concluded among the applicant and two respondents on July 9, 2010 outside the Arbitral Tribunal, and the content of such Reconciliation Agreement stipulated the civil rights and obligations at both Parties’ own disposals are legal and valid. And those Parties had no dispute on the stipulations of such Reconciliation Agreement. Thus, the Arbitral Tribunal affirmed.

3. Views on the Arbitration Requirements of Applicant

Based on relevant regulations of Arbitration Rules and common wish of those Parties, and according to the facts previously inspected and evidences currently existed, the Arbitral Tribunal supported the applicant’s arbitration requirements. However, because the arbitration requirements made by those Parties according to Arbitration Rules only involves the debts and credits among applicant and two respondents, and this Arbitral Tribunal does not made any adjudication that influenced the rights or interests of any bona fides third Party outside this case.

. Adjudication (Main Text)

Adjudications of Arbitral Tribunal are as follows:

Please refer to Articles 1 to 3, Reconciliation Agreement.

The arbitration fee of this case shall be undertaken by the applicant. Such arbitration fee was offset by the arbitration charges prepaid by applicant at equal amount.

This Adjudication is final and effective upon the date when it is given

 The two respondents filed applications to the Foreign Exchange Administration Department of China and India according to such Adjudication, respectively, and fulfilled their respective obligations of payments.

 Comments:

This case has three issues needed to be further discussed:

. Attorney presided over or participated in the mediation activity as an independent party

 “As the traditional view says, a good lawyer shall be a person debating fiercely at the court”, which do exist in some lawyers’ lives, but not in all lawyers’ lives. As a matter of fact, two arguments existed in the real practice: first, lawyers serve as an agent ad litem, safeguard legal sanctity, play the functions of legal instruction and evaluation functions; second, lawyers shall take the social responsibilities, and participation in mediation practice is their obligatory duties. The author thinks that there shall be no dispute, theoretically and practically speaking, on the fact that lawyers presided over or participate in the mediation practices as an independent third party, which is especially important at current days when the state emphasizes on the construction of harmonious society. In foreign countries, lawyers, participating in the mediation practice as an independent party, have already become the main power in ADR (Alternative Dispute Resolution). The view that “lawyers, sophisticated in laws, are qualified lawyers; lawyers, sophisticated in arbitration, are good lawyers; lawyers, sophisticated in mediation, are excellent lawyers” is becoming the consensus.

. Problems in mediation-to-arbitration shall be noted from the perspective of presiding over mediation

1. The text of Reconciliation Agreement shall be arbitrable

The text of Reconciliation Agreement containing the obligations that both parties shall fulfill will be the content of Adjudication. Thus, the text of such Reconciliation Agreement shall be rigorous in letters and expression, shall not contain any ambiguous, self-contradictory language or unclear description toward the time limit and object. Otherwise, the arbitration procedure will be delayed, or the Arbitral Tribunal cannot make Adjudication.

2. Arbitration provisions must be legal, valid, rigorous and specific.

According to the stipulations of Arbitration Law, valid arbitration agreement shall include: the declaration of intention of instituting arbitration proceedings, arbitration items and arbitral institutions selected. But the mediation-to-arbitration provisions shall also include:

1). both parties agree that Arbitral Tribunal may make adjudication according to the text of Reconciliation Agreement;

2). the organization of Arbitral Tribunal;

3). The Arbitral Tribunal authorized shall hear and make adjudication through appropriate procedures and rapid method, and such procedure and time limit shall not be confined by arbitration rules.

3. Select an appropriate arbitrator

Mediation-to-arbitration is the arbitration affirmation procedure, which is not familiar to all arbitrators. Meanwhile, parties involved always have a strong requirement on timeliness. According to the author’s practice, the arbitrator, familiar with the mediation works and has time and energy to make adjudication rapidly, or the arbitrator appointed by Arbitration Committee, shall be selected, so that the delay in arbitration procedure due to the inappropriateness of arbitrator can be avoided.

4. No all disputes can be settled through applying the method of Mediation-to-arbitration.

Whereas, the Arbitral Tribunal mainly emphasizes on inspecting the legality of such Reconciliation Agreement in procedure, and cannot make a complete and deep inspection on the substantial matters hidden in such Reconciliation Agreement

5. Issues should be avoided in Reconciliation Agreement

1). Ineligibility of Parties involved;

2). Infringement upon national and social public interest;

3). Infringement upon the interest of a third party outside this case;

4). The text in Reconciliation Agreement is not the real intention of both Parties.

 

. Suggestions on the arbitration rules and charging standard

1. Relevant stipulations on the appellation of Parties involved in such mediation-to-arbitration.

According to the stipulations of Article Ten of Arbitration Rules, CIETAC, Parties involved in this arbitration are applicant and respondents. All three Parties involved in above-mentioned case don’t want to be defendants, and after repeatedly negotiations, they reached a unanimous conclusion that the “plaintiff” shall pay the arbitration fee, then the problem that who shall be “plaintiff” was solved; therefore, if Parties involved, as joint applicants, filed an application for the confirmation procedure of mediation-to-arbitration, such application shall be approved, and the arbitration rules shall be modified accordingly.

2. Applicable and practicable acceleration in arbitration procedure

Of course, the speed of such procedure primarily depends on the preparation works of Parties involved and the quality of Reconciliation Agreement. However, in normal circumstances, the reason why Parties involved adopt such method of mediation to arbitration is to accelerate the arbitration procedure to the certain extent. Thus, Secretary Bureau and Arbitral Tribunal shall accelerate such procedure whenever practicable and applicable.

3. The arbitration fee shall be more attractive

Parties involved are entitled to choose to arbitrate or litigate, and choose arbitral institution, when choosing the arbitral institution to confirm and issue judicial documents, parties involved will take factors including the overseas enforceability, brand, efficiency and fees of such institution into considerations. Author notices that Article 19 of Supreme People’s Court’s Several Rules on the Judicial Confirmation Procedures of People’s Reconciliation Agreement (Exposure Draft) stipulates that “when applying for judicial confirmation, Parties involved may refer to Article 30 of Rules of Paying to the Litigation Costs. “Litigation cost for non-property case is 50-100 Yuan, which apparently is a nice try. Although it is impossible for commercial arbitration institution, as a public institution with its expenses paid by its earning, to adopt the above-mentioned standards as its own charging standards, such standards have practical significance on determining the appropriate and evident charging standard for mediation-to-arbitration and for the arbitration cost estimated by parties involved, and enhancing the attraction of adopting such method as dispute settlement way.

 

 

*1 Partner of Beijing Jingze Law Firm.

*2 Paralegal of Beijing Jingze Law Firm.

 

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