INTRODUCTION

International parties seeking to enforce contracts in the PRC have  long been wary of what they often see as unfamiliar and restrictive  China-seated arbitration procedures. Recently, in an important and novel  development for the jurisdiction, various reforms have provided greater  clarity and acceptance of international best-practice protections for  parties undertaking arbitration in Mainland China. Foreign parties,  however, will continue to exercise caution.

Emergence and reform

China is the busiest arbitral venue in the Asia Pacific region by virtue of its size.[1]  The PRC’s most prominent arbitral institution, the China International  Economic and Trade Arbitration Commission (“CIETAC”), is the world’s  largest international arbitration institution in terms of caseload and  has reported further growth in recent years.

Recently, in a bid to further build upon CIETAC’s growth, and ensure  its procedures better reflect international best practice, the  Commission updated its arbitration rules and opened a sub-commission in  Hong Kong, its first outside of Mainland China. Another of the PRC’s  leading arbitration commissions, the Beijing Arbitration Commission  (“BAC”), is likewise planning to issue new rules in the course of 2013.

While China’s Arbitration Law was last amended in 1995[2],  the country’s lawmakers this year introduced several “pro-arbitration”  changes to the Civil Procedure Law (the “CPL”) intended to increase the  certainty of the arbitration process and expand the range of assistance  which the courts can offer to arbitral proceedings.[3]

CHINA’S UNIQUE ARBITRATION REGIME

Considerations for foreign parties

Despite the growing popularity of CIETAC, and other Chinese  arbitration commissions, non-Chinese parties may be reluctant to submit  themselves to arbitration in China, a process which can be restrictive  and inflexible.

Arbitrations seated in China, by contrast with other more  arbitration-friendly jurisdictions, are subject to the wide-ranging  jurisdiction of the local courts, which actively supervise (and also  intervene in) China-seated arbitrations. For example, under Chinese law,  applications for interim relief are ultimately dealt with by the  Chinese courts, rather than by the arbitrators themselves, as is  permitted in other jurisdictions. Moreover, such interim measures are  limited in their scope to only two categories; the preservation of  property and evidence.[4] Chinese law does not allow for pre-arbitration relief such as security for costs.

Chinese arbitration procedures, as exercised by mainland Chinese  arbitrators, can also be alien to western traditions. International  arbitrations typically have a strong adversarial component — for  instance, arguments are led by the parties’ submissions —whereas Chinese  arbitrators tend to play down these adversarial aspects and employ an  inquisitorial procedure led by the tribunal’s questioning. In addition,  PRC arbitration often incorporates little in the way of witness evidence  and documentary production. While this may often lead to a quicker and  cheaper dispute resolution process, many Western practitioners and  parties fear that it jeopardizes the opportunities for a fair outcome.

Many arbitrations involve an element of mediation, a hybrid procedure  referred to as ‘med-arb’, whereby arbitrators move between an  “adjudicative” role in which they reach findings based only upon the  facts and the law  and a “facilitative” role in which they assist the  parties to reach a commercial settlement based on their respective  bargaining positions.[5]  This med-arb procedure has received a mixed reception from Western  commentators. Critics consider that such procedures have a negative  impact on the integrity of the arbitral process as confidential  information disclosed to the arbitrators in the facilitative stage might  prejudice their adjudicative role, leading them to stray away from a  straight consideration of the presented facts and the applicable law.

Offshore resolution or modified procedure?

For the above reasons, foreign parties have historically preferred to  seat their arbitrations in neutral venues such as Hong Kong and  Singapore, where this can be agreed with the Chinese party. This has the  important additional benefit that the resulting award is treated as a  foreign award for the purposes of enforcement in China, and is therefore  subject to a stronger, and more effective, enforcement mechanism than  are domestic awards.

China signed and ratified the New York Convention in 1987. Since the  late 1990s the PRC has implemented a special procedure for the  enforcement of foreign arbitral awards under the New York Convention.[6]  This requires the approval of the Supreme People’s Court of any  decision by a lower court not to enforce a foreign award under the New  York Convention. The system is imperfect and has attracted criticism for  its lack of transparency and insufficient involvement or notification  of the parties. Nevertheless, it has been credited with creating an  increasingly pro-enforcement culture for the enforcement of foreign  arbitral awards in mainland China. This culture has arguably been  bolstered by China’s growing foreign direct investment and the resulting  interest that China has in supporting the New York Convention regime  for the enforcement of arbitral awards.

Notwithstanding the usual preference of foreign parties to arbitrate  outside of China, they will sometimes have no choice but to pursue  arbitration proceedings in mainland China. For instance, parties may be  restricted from pursuing offshore arbitration by the Chinese law  requirement that only “foreign related” disputes may be resolved outside  of the PRC.[7]  Importantly, this provision often captures not only disputes between  Chinese businesses and state owned enterprises (“SOEs”) but also  locally-incorporated subsidiaries of foreign companies which, as they  are considered domestic parties for the purposes of Chinese law, may  have no choice but to seat their arbitrations in mainland China.

Where parties have no choice but to submit any dispute to  China-seated arbitration, they would be advised to negotiate  modifications to their arbitration clauses in order to render the  arbitral procedure more in line with international practice. Such  modifications may include providing for an English language,  adversarial, arbitration procedure, administered by a tribunal of  experienced international arbitrators.

However, the parties are also limited in their freedom to agree  modifications to the procedure of a China-seated arbitration. For  instance, PRC law generally prohibits the parties from agreeing foreign  arbitral institution, such as the ICC or HKIAC, as the administering  authority for a China-seated arbitration. Ad hoc arbitration seated in  China is also not recognized. [8]

CHANGES IN CHINA’S DOMESTIC ARBITRATION OFFERING

2012 CIETAC Rules

CIETAC brought into effect a number of amendments to its rules on 1  May 2012. The new provisions contain numerous amendments aimed at  addressing the concerns of parties, including foreign parties, and  bringing CIETAC’s rules further into line with those of leading  international arbitration institutions.

For example, under the old rules, the default language of arbitration  was Chinese, meaning that parties which failed in their arbitration  clauses to explicitly specify another applicable language had no choice  but to proceed with Chinese-language proceedings. This would be the case  even in circumstances where all previous business relations between the  parties were conducted in English. The new rules remedy this issue by  providing CIETAC with the discretion to designate the appropriate  language for the proceedings, taking into account the circumstances of  the case.[9]

The 2012 Rules also provide the tribunal with greater flexibility in  relation to interim measures, although these provisions are explicitly  stated to apply only in circumstances where the domestic law of the  dispute allows, meaning they remain subject to the restrictions of  Chinese law where the arbitration in question is seated in the PRC.[10]

The new provisions also update CIETAC’s procedure for resolving  impasses between claimants and respondents in cases where multiple  claimants or respondents make joint arbitral appointments.[11]  In addition, the 2012 Rules increase the threshold for CIETAC’s  fast-track summary procedure from RMB500,000 to RMB2 million, reflecting  the increased value of claims brought before CIETAC.[12]

One objective of the new Rules is to internationalize CIETAC’s role.  While the previous rules provided that arbitral proceedings shall take  place in mainland China unless the parties agree otherwise,[13]  this requirement is removed in the new rules. Now, under the revised  rules, in the absence of party agreement, CIETAC has the flexibility to  choose a foreign arbitral seat if the circumstances of the case suggest  that this is appropriate.[14]  CIETAC arbitrations may therefore be seated outside China, provided  doing so does not conflict with the restrictions of Chinese law.

The new rules also make explicit CIETAC’s ability to administer  arbitrations conducted in accordance with the arbitration rules of other  arbitration institutions.[15]

Remaining questions

The above reforms are clearly welcome. However international parties  will continue to be wary, notably when it comes to the parties’ ability  to select an arbitral panel of appropriate international experience and  outlook. Under CIETAC’s Rules, unless otherwise agreed by the parties,  arbitral appointments will be made from CIETAC’s own Panel of  Arbitrators (approximately 75 percent of which are domestic Chinese  arbitrators) and in accordance with CIETAC’s schedule of fees, which is  considered low by international standards. Moreover, unlike the rules of  many other international arbitration institutions such as the HKIAC or  the ICC, the CIETAC Rules do not provide that the sole or presiding  arbitrator shall be of a nationality other than those of the parties.[16]

To improve the possibility of a satisfactory arbitral tribunal,  parties may choose to negotiate an arbitration clause that provides that  they may appoint arbitrators outside of the CIETAC Panel of Arbitrators  and that the arbitrators’ remuneration may be set without reference to  CIETAC’s fee schedule. They may also specify that the sole or presiding  arbitrator shall be of a nationality other than that of the Parties.

Division and multiplication: CIETAC’s mainland sub-commissions

While 2012 saw much good news for the Commission it also saw a highly  public spat between CIETAC and two of its mainland sub-commissions.  In  response to CIETAC’s 2012 rules coming into effect, its Shanghai  sub-commission announced that it had split from CIETAC Beijing and was  declaring itself an independent arbitral institution with its own rules  and panel of arbitrators.[17]  CIETAC’s Shenzhen/South China sub-commission likewise declared  independence. Following three months of announcements and  counter-announcements, CIETAC Beijing suspended and then terminated its  authorization of both commissions.[18]

The key driver behind the split appears to have been a new  requirement in the 2012 rules which, according to most commentators, has  the effect of increasing the role of CIETAC Beijing at the expense of  its sub-commissions. The new rules provide that, absent specific  nomination by the parties of a named sub-commission, the Secretariat of  CIETAC in Beijing shall accept the arbitration application and  administer the case.[19]  In the past, any arbitration application where the parties made only  general reference to “CIETAC arbitration” would be allocated to one or  other sub-commission based on considerations of party convenience. By  contrast, under the new rules these cases will by default be referred to  CIETAC Beijing.

The split does CIETAC reputational damage but, more seriously, it may  also adversely affect the certainty and finality of CIETAC proceedings  in the region. With CIETAC Beijing having established new arbitration  sub-commissions in Shenzhen and Shanghai, there now exist rival “CIETAC”  sub-commissions in those locations, each claiming legitimacy and the  support of different judicial bodies. Nomination of either entity by a  party whose arbitration clause specifies CIETAC arbitration in Shanghai  or Shenzhen runs the risk of a challenge in the courts by the respondent  party.

These considerations arguably provide foreign parties with a further  reason, where possible, to refer disputes to offshore arbitration rather  than to “CIETAC Shanghai” or “CIETAC Shenzhen”. Alternatively they may  choose to have the dispute administered by another local entity or else  by CIETAC Beijing, notwithstanding that the location of any hearings  shall be Shanghai or Shenzhen.

Legislative reforms

Even as CIETAC’s internal divisions attract public attention, the PRC  introduced low-key, but significant, legislative changes which will  affect arbitration in China. These include two key changes to the  amended Civil Procedure Law (CPL) which came into force on 1 January  2013.

First, new provisions have been introduced to facilitate interim  relief. While they do not overturn the Chinese law prohibition against  tribunal-ordered interim measures, the new provisions allow for a more  flexible system when it comes to protecting assets before the  commencement of arbitral proceedings.[20]

Secondly, the amended CPL reduces the scope for the setting aside of  domestic arbitration awards in China. Previously such a challenge could  be brought on the grounds that the arbitration tribunal had made errors  of fact or law in making their determination.[21]  Under the revised CPL both grounds for challenge are removed and  replaced with far narrower grounds that evidence in the arbitral  proceedings had been forged or withheld.[22]  This amendment is a welcome development which will potentially increase  the certainty of arbitral proceedings and reduce the potential for  additional cost and delay in China-seated arbitrations.

CONCLUSIONS

Recent reforms, such the above amendments to the CIETAC Rules, give  some comfort to international parties looking to enforce contracts by  PRC-seated arbitration proceedings. Taken together and applied with the  benefit of a well-drafted arbitration clause, they offer parties the  potential for a CIETAC-administered arbitral procedure incorporating  many if not all of the elements of international arbitral best  practices. Such a clause would provide for an adversarial procedure  incorporating an appropriate measure of document production and,  importantly, the appointment of an internationally experienced panel,  reflecting the nationalities of the parties.

The international arbitration community is eagerly awaiting further  reform and liberalization of China’s arbitration infrastructure. Two  such measures would allow non-Chinese arbitration commissions to  administer China-seated arbitrations, and the ceding of greater powers  to domestic arbitration tribunals. Until such reforms are implemented  international parties will remain wary of referring their disputes to  arbitration seated in China.

Preferred citation: David Howell, James Rogers & Matthew Townsend, Chinese Arbitration—Still Distinctive, 3 Harv. Bus. L. Rev. Online 196 (2013), http://www.hblr.org/?p=3326.

[*] Fulbright & Jaworski LLP, London, Hong Kong and Beijing.

[1] For the purposes of this article  references to “China” or “the PRC” should be taken to exclude the Hong  Kong SAR which is treated as a separate jurisdiction for the purposes of  arbitration.

[2] Arbitration Law of the People’s  Republic of China, adopted at the 8th Session of the Standing Committee  of the National People’s Congress on August 31, 1994 and Promulgated by  the Order [1994] No. 31 of the President of the People’s Republic of  China. Note that, while the Arbitration Law has not been amended in this  time, interpretations have been issued as late as 2006.

[3] Order of the President of the People’s Republic of China No. 59, August 31, 2012.

[4] For more information on this process  see 256 of the Civil Procedural Law of the PRC and Article 68 of the  Arbitration Law of the PRC.

[5] See for instance Articles 50 and 51 of the Arbitration Law of the PRC. See also Article 71 of CIETAC’s 2012 rules.

[6] This “reporting system” requires  that the lower courts are unable to refuse enforcement without referring  the case to the higher courts and, ultimately, the Supreme People’s  Court in Beijing.

[7]China’s Supreme People’s Court has  published two judicial interpretations (in January 1998  and July 1992)  which indicate that a foreign-related dispute is one: (a) that involves  at least one foreign party; (b) where the subject matter in dispute is  in a foreign country; or (c) where there are facts establishing the  legal relationship between the parties which occurred in a foreign  country.

[8] Although Chinese courts have  enforced an award issued by an ICC tribunal seated in mainland China,  this was on extremely narrow grounds.

[9] Article 71(1), CIETAC 2012 Rules.

[10] Article 21(2), CIETAC 2012 Rules

[11] Article 27, CIETAC 2012 Rules.

[12] Article 54(1), CIETAC 2012 Rules.

[13] Article 31(2), CIETAC 2005 Rules.

[14] Article 7(2), CIETAC 2012 Rules.

[15] Article 4(3), CIETAC 2012 Rules.

[16].It is true however that the new  CIETAC Rules do provide that the CIETAC Chairman shall take into  consideration certain factors regarding the nature of the arbitration,  including the parties’ nationality, in making any appointments (Article  28, CIETAC 2012 Rules).

[17] See Shanghai Commission press release dated 2 May 2012 accessed at http://www.cietac-sh.org/Untitled-10.aspx on 19 November 2012.

[18] See CIETAC press release dated 1 August 2012 accessed at http://www.cietac.org/index.cms on 19 November 2012.

[19] Article 2(6), CIETAC 2012 Rules.

[20] See Article 101 of the amended CPL.

[21] See Article 213 of the original CPL.

[22] See Article 237 of the amended CPL.