South China's Judicial System: Corrupt? Lacking Experience?

UNCLAS SECTION 01 OF 02 GUANGZHOU 000789 SIPDIS SIPDIS SENSITIVE PACOM for FPA E.O. 12958: N/A TAGS: PGOV SOCI ECON EINV CH SUBJECT: South China's Judicial System: Corrupt? Lacking Experience? Apply Today!! ¶1. (SBU) Summary: Procedural and structural flaws continue to impede the progress of China's judicial system, according to south China legal experts. Oral testimony, a key to perjury trials and many arbitral disputes, remains largely unreliable and thus, underutilized. Increased judicial activism provides encouragement for some, while lack of legal expertise -judges in South China are largely former policeman and government officials who typically have no legal training - is a concern for all. A lack of confidence in the judiciary has led many people to use alternative dispute resolution (ADR) mechanisms. Unfortunately, the same issues which plague South China's judicial system often extend to its ADR. End Summary. Legal Dispute Resolution: Procedural Inadequacies and Encouraging Signs -------------- -------------- ¶2. (SBU) Corruption permeates the business climate at all levels in South China. According to legal experts, this problem extends to the judiciary as well. David Buxbaum, an attorney practicing in Guangzhou and one of the only foreign litigators admitted to argue before the Chinese courts, said that since there is no enforcement against perjury, the judiciary does not rely on oral testimony. Furthermore, remedies may take years to impose, leading many parties to resort to ADR mechanisms, such as arbitration. Ultimately, however, it is the court's role to enforce the arbitrator's judgment against the assets of the Chinese company. In many instances, this extra step only serves to nullify any judgment granted to the aggrieved party (see below). ¶3. (SBU) Another characteristic of South China's court system is the low level of judicial abstention and its high level of intervention in the resolution process. One American legal consultant who works for a Chinese firm in Guangzhou spoke of an incident in which his firm, upon submitting its argument, implicitly threatened the judge to settle the case or face an inevitable appeal. The judge then spent an entire day alone with the other party, pressuring and negotiating until it agreed to a satisfactory settlement. Despite the potential for abuse by judges, many legal observers and foreign legal professionals actually embrace this trend, at least in the absence of a more formal settlement structure. They believe judges are finally demonstrating an ability to argue and, more importantly, a willingness to inject themselves into the judicial system. Arbitration Awards: Lack of Recognition -------------- ¶4. (SBU) According to one prominent foreign lawyer in Guangzhou, foreign investors lack confidence in China's ability to enforce international arbitration awards because of the inexperience of its judiciary. While the process of selecting judges from a pool of legal professionals has just recently begun to take place in areas like Beijing and Shanghai, judges in South China are largely former policeman and government officials who typically have no legal training. As various legal experts in the region have pointed out, this should not affect the recognition of arbitration awards, since China is a signatory to numerous multilateral treaties, including the New York Convention, which essentially compels both award recognition and enforcement. However, judges often ignore these treaties and re-litigate the issue according to Chinese law. ¶5. (SBU) Courts in South China routinely ignore foreign awards without justification or explanation, according to Vivian Desmonts, managing partner for DS Law Firm. This environment of uncertainty has not only had a chilling effect on potential trade, he said, but has also led many legal experts in the region to advise clients to submit to the China International Economic and Trade Arbitration Commission (CIETAC) for all dispute resolution, since local judges will often look more deferentially on its own rulings than on those of a foreign arbitration institution. CIETAC's statistics suggest that this message is being heard. According to Yu Jianlong, Vice Chair and Secretary General of CIETAC, over 981 cases were filed with the institution in 2006 - almost four times the amount received just 15 years earlier. ¶6. (SBU) Others argue that the problem lies not in the courts but rather in the ability of Chinese companies to hide assets and the willingness of South China's institutional bureaucracy to enable them to do so. Comment -------------- ¶7. (U) Confidence in South China's judicial system remains fragile among foreign investors. As long as local courts refuse to establish reliable procedures for oral testimony, the situation is GUANGZHOU 00000789 002 OF 002 not likely to improve. And while arbitration is still overwhelmingly preferred to litigation, many have found that enforcement can often be equally unreliable. Accordingly, many resort to local arbitration institutions, such as CIETAC, to resolve their disputes, since the decisions are often looked upon more favorably by the local Judiciary. GOLDBERG