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A Local Firm's Baffling Trip Through China's Arbitration System

Origon Group finds that the country's method of resolving disputes still lacks openness.

December 26, 2003|Evelyn Iritani | Times Staff Writer

SHANGHAI — The forlorn building on Nanjing Road, this city's Rodeo Drive, was supposed to represent a pioneering effort to tap the pocketbooks of China's nouveaux riches.

It did, for a while. But now the six-story building sits empty, its dusty windows boarded up and its once-elegant facade faded. When the weather's warm, hawkers peddle cheap T-shirts and underwear in the main entryway of what was the Sino-American Shanghai Wan Xiang Empire Department Store.

Five years after the now-defunct store's grand opening, Origon Group Corp., a small Los Angeles-area investment firm, is embroiled in a legal dispute in a country where the transition from "rule of man" to rule of law is far from complete.

Not long ago, Mark Hartzler, Origon's L.A. attorney, might have advised his client to write off the $10 million it lost in the department store deal as an expensive lesson in global risk. But when China joined the World Trade Organization in 2001, Beijing vowed to rewrite its laws and clean up its court system. The next year, the Californians decided to test the promise of post-WTO China.

"We were hoping that now that it had entered the WTO, China would be more interested in showing how private disputes can be resolved," Hartzler recalled recently.

Origon's travails since serve as a reminder that though China's judicial system has undergone significant modernization, it still is plagued by a lack of transparency, by influence peddling and by other problems that make it difficult for foreigners to get fair hearings, according to legal and commercial experts in China.

"Don't think you're going to fall back on the court system if things go bad," Thomas Lee Boam, the former chief U.S. commercial consul in Beijing, warned a group of American executives attending a China seminar at USC. When Boam left China's capital this year for a new posting, there were $9 billion in disputes sitting on his desk, the biggest pile of commercial legal trouble anywhere in the world.

Since China's Communist leaders launched their economic reforms, inept judges have been removed and thousands of laws have been written or revised. Still, most judges are appointed by the party, and fewer than 7% have formal training, according to legal experts.

So foreigners often bypass the courts in favor of arbitration, which in China, as around the world, often is a less expensive and less time-consuming alternative.

Today, the China International Economic and Trade Arbitration Commission is the busiest arbitration agency in the world, said Jerome Cohen, a New York University professor and an expert on Chinese law. The commission is an arm of the China Council for the Promotion of International Trade, a government-affiliated association.

Established in 1959, the arbitration commission has aimed to keep up with the times. It has incorporated some of the international regulations followed in the U.S. -- though not all of them. For instance, there is no ethical code spelling out what a conflict of interest is or detailing the notion of confidentiality. Critics say that leaves arbitrators vulnerable to outside pressure from politicians or businesspeople.

"What goes on in court is only 10% of the action," said Cohen, who has served as an arbitrator on the commission's panels. "Everybody is contacting everybody right up to the prime minister's office about an important case. That isn't the way we expect the game to be played."

The Californians didn't know what to expect when they arrived in Shanghai in the spring of 2002. For Hartzler, who had never been to China, Shanghai was a dizzying blur of high-rise office towers, glitzy retail stores and crowded streets.

He felt relieved when he walked into the arbitration commission's offices on the seventh floor of Jin Ling Mansion. This was no bleak, Communist-era interrogation chamber. The wood-paneled room would have fit into any big-city law firm back home.

In China, a dispute is heard by a three-person panel. Shanghai Shi Mao Co., the real estate firm with which San Dimas-based Origon had invested in the department store, tapped Zhou Han Ming, a powerful Shanghai lawyer who was deputy president of the Pudong New District, the city's fast-growing financial district. Origon's choice of arbitrator was Yao Zhuang, a prominent law professor. The chief arbitrator was Xia Fang, a top official at the commission's Shanghai office.

The case outlined by Origon's attorneys was one of alleged deception and fraud. In the summer of 1995, the investment group decided it wanted a foothold in China's emerging consumer market. Through a friend of an Origon investor, the U.S. firm was introduced to executives from Shanghai Wan Xiang Co., a large real estate company.

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