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

UNCLAS SECTION 01 OF 02 GUANGZHOU 000789

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TAGS: PGOV SOCI ECON EINV CH
SUBJECT: South China's Judicial System: Corrupt? Lacking Experience?
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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
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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
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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
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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