Embarrassing stumble for China's good-guys

A DECISION in Hongkong's Supreme Court which effectively overturned an arbitration ruling made in China, has caused a stir in some China trade and legal circles.

To hear some Hongkong-based lawyers tell it, China's ''good guys'' have stumbled embarrassingly and many observers wonder what lies ahead.

A dispute between Paklito Investment and Klockner East Asia that found its way into Mr Justice Kaplan's court this month was complicated but all too familiar to those familiar with legal wrangles in China.

The case involved a dispute over the landed condition of a 2,500-tonne, US$1.9 million shipment of galvanised steel coil sent from Istanbul to Huangpu in Guangdong in January 1989.

Hongkong-based Klockner held that the steel coil was delivered on a C-and-F basis (cost plus freight but not including insurance) in good order.

However, on April 19, 1989 claims were made by a series of sub-purchasers and Paklito Investment, a Hongkong arm of a state-owned metals buyer in China, against Klockner for defective goods.


The original contract, a relatively standard document in China trade terms, contained a clause providing for arbitration in China should a dispute arise.

Facing a legal impasse, most experienced businessmen would much prefer to test their luck in China's arbitration system than its domestic legal system.

Because China is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) - also known as the New York Convention - the mainland's arbitration system complies with the highest international standards.

This is much more than can be said for its civil legal system.


China's International Economic and Trade Arbitration Commission - not part of the civil legal system - ruled against Klockner and the plaintiffs sought to collect money from Klockner in Hongkong as provided for in the New York Convention which both Hongkong and China have signed.

However, the Hongkong Supreme Court dismissed an appeal by Paklito against an earlier Hongkong ruling which overturned the Chinese award against Klockner.


In simple terms Mr Justice Kaplan held that the Chinese arbitration panel reached its verdict via a process not fully conforming to the New York Convention and as such the Hongkong court would not enforce the Chinese decision.

Mr Justice Kaplan made a point of distinguishing this case from the generally high standards seen in China's arbitration system.

However, he was scathing in his criticism of the conduct of the Paklito-Klockner case: ''I have no doubt whatsoever that a serious procedural irregularity occurred and that on reflection the arbitral tribunal would recognise it as such.'' The question now is whether the Chinese side will accept the Hongkong court's decision or choose to take the matter to the Hongkong Court of Appeal within the coming week.


Worriers hope the Chinese side's embarrassment won't create difficulties between the two jurisdictions, but optimists reckon this case could spur greater professionalism in an already well-functioning mainland system. - KEVIN MURPHY