China’s signing of the UN’s International Settlement Agreement will not only benefit international businesses, but might also lead to domestic legal reforms, write Peter Corne and Matthew Erie
Last year, China signed the United Nations Convention on International Settlement Agreements Resulting from Mediation, known as the Singapore Mediation Convention. This was a momentous event in the development of the cross-border dispute resolution industry and provides China with an opportunity to develop a dispute resolution mechanism that addresses its international strategic commercial needs better than existing adjudicative forms, such as litigation and arbitration. These needs could propel China to become a primary service provider for the resolution of international commercial disputes by way of mediation – provided that China, through judicious capacity building – can fully professionalise its commercial mediation services institutions.
The United Nations Commission on International Trade Law approved the Singapore Mediation Convention (SMC) in 2018 with the UN General Assembly adopting it shortly afterwards. By the summer of 2019, 46 nations signed on to the SMC including China, India and the US. Although the UK, the EU and Japan have yet to sign on, it has broad support and further signatories are expected.
These needs could propel China to become a primary service provider for the resolution of international commercial disputes
China, for its part, has a long history of mediation. Mediation traditionally was limited to family, civil and property disputes. This preference is reflected in the Peoples’ Mediation Law of 2010, which describes mediation as a form of semi-official, non-professional neighbourhood and community mediation. In the context of a Confucian society, mediation tended to be practised with the help of elders as conciliators, whose practice of mediation was highly evaluative or didactic. Commercial mediation was practised for a long time by judges who, partly in response to high caseloads, would switch roles from judge to mediator in order to accelerate the resolution of cases.
In contemporary China, the birth of modern commercial mediation can be traced to the years immediately preceding the 2012 amendment to the Civil Procedural Law. Article 122 states that in any civil case, unless the parties refuse, an attempt must be made to come to a mediated settlement.
In the years prior to the 2012 amendment, pilot programmes had been initiated in the court system and commercial mediation rules were subsequently issued in the insurance, securities, construction, e-commerce, medical and other industries. Industry based mediation centres, as well as comprehensive commercial mediation centres such as the Shanghai Commercial Mediation Center (SCMC), (established in August 2011) were formed.
The SCMC is a Shanghai registered NGO with its own panel of mediators and is a project unit with a key role under the Diversified Dispute Resolution Mechanism Reform led by the Judicial Reform Office of the PRC Supreme People’s Court. It has formed relationships with bodies throughout the world, including entering into a strategic cooperative relationship with US-based JAMS ADR, which has contributed to the elevation of the capabilities of SCMC’s mediators and professional staff through training. The pace of integrative collaboration accelerated with the formation of a joint panel of mediators in 2018.
Mediation is cheaper, simpler, and quicker than litigation or arbitration [and] the SMC can facilitate the Belt and Road Initiative
The PRC government has been generally supportive of the SMC and contributed through its participation in the drafting of the SMC text. However, the United Nations General Assembly resolution to adopt the SMC triggered a heated debate between various authoritative bodies in China as to whether China should accede to the SMC at all. These debates centred around China’s lack of a national law on commercial mediation that sets out general standards that address mediator qualification and confidentiality; the need to amend the Civil Procedure Law to address issues such as the SMC’s by-passing of the recognition procedure mandated by the Civil Procedure Law; and the inconsistency arising from the PRC requirement to confirm settlement agreements judicially for such agreements to become enforceable.
For the PRC, the advantages of signing the SMC are clear. First, the SMC provides a process for the direct enforcement, through local courts, of cross-border settlement agreements between two parties resulting from mediation, as long as the state, where enforcement is sought, is a member. Second, mediation is cheaper, simpler, and quicker than litigation or arbitration. Third, the SMC can facilitate the Belt and Road Initiative (BRI), President Xi Jinping’s program to link China’s economy with those throughout the global South through trade and investment.
Mediation is unfettered by PRC arbitration’s structural and procedural limitations. Mediation does not involve any governing law, or procedural law of the arbitration seat or risks derived from any compromised independence of those delivering awards, as the credibility of mediators hinges merely on their ability as solution facilitators. Further, mediation is a flexible enough device not to be hampered by cultural and legal system differences – a key issue that has the potential to severely hamper the increase of investment, particularly in the private sphere, along the BRI.
However, the SMC presents China with significant challenges. First, there are inconsistencies between the SMC and domestic PRC law. As mentioned, there is not yet any national law in the PRC that recognises and harmonises standards in respect to commercial mediation. Second, most commercial mediation in China is either conducted by the courts or by commercial mediation centres by way of referral from the courts. There are still not many truly private sector commercial mediations that arise independently of the court system. Third, it has been difficult, to date, to convince the majority of legal professionals in China that their interests and those of their clients would be well served by using commercial mediation in advance of resorting to arbitration or litigation.
Through educating the market and the creation of a body of professional international mediators and mediation centres of international repute, China can become an international commercial mediation centre.
Non-Chinese parties are reluctant to sign on to using commercial arbitration or litigation in China. But international commercial mediation in China – now that it has overcome, by virtue of the SMC, its most obvious disadvantage compared to arbitration (ie enforceability) – has the opportunity over time to exceed the utility rates of arbitration for international disputes.
Through educating the market and the creation of a body of professional international mediators and mediation centres of international repute, China can become an international commercial mediation centre. Given the natural conservatism of Chinese state-owned enterprises, over the short term, the greatest opportunity for growth would be to tap into the market for disputes of small and medium-sized enterprises (SMEs).
The cost, time, complexity and inconvenience of arbitration has, to date, discouraged SMEs from resorting to arbitration to resolve their cross-border disputes. We expect that the absence of such impediments in cross-border mediation, with ample market exposure, will lead to a progressive increase in usage which, in due course, will place international mediation at the very centre of BRI dispute resolution strategy.
Peter H. Corne is the Managing Partner of Dorsey & Whitney’s Shanghai Office, NYU Global Adjunct Professor of Law, and Mediator of the Shanghai Commercial Mediation Center. Matthew S. Erie is an Associate Professor of Modern Chinese Studies and Associate of the Centre for Socio-Legal Studies of the University of Oxford, and Principal Investigator of the “China, Law and Development” research project, funded by the European Research Council.