Mark J Beeley, James L Loftis

Vinson & Elkins RLLP

Arbitration has always been popular in China, fitting as it does with Confucian values and in particular with the belief that a formal dispute breaches the fundamental principle of business arrangements - that both parties should find a benefit. Given concerns over the difficulties of navigating the People's Republic of China's complex and sometimes inconsistent court system, foreign parties doing business in the PRC and with Chinese parties have similarly preferred arbitration. Recent statements issued by the PRC courts, if put into practice, should make them feel increasingly comfortable in doing so.

Chinese law on international arbitration was based (as is increasingly the norm) on the UNCITRAL Model Law on International Commercial Arbitration, but, that being said, there are a number of traps for the unwary who are used to operating in Model Law jurisdictions. The principle legislative source is the Arbitration Law of the PRC (which came into effect on 1 September 1995). In addition reference must be made to Chapter XXVIII (articles 257 to 261) of China's Civil Procedure Law. These two statutes are supplemented by the 1995 Notice on Foreign and Foreign Related Arbitrations, the Supreme Court's Interpretation of the Civil Procedure Law of 14 July 1992 (articles 313 to 317) and, perhaps more interestingly for the foreign investor, its Judicial Interpretation of 8 September 2006 (the 2006 Interpretation).

The 2006 Interpretation has been generally welcomed by international commentators. If realised it brings increasing certainty to PRC seated arbitrations, and takes significant steps to narrow the scope for highly technical challenges to awards rendered in the PRC. For instance, the 2006 Interpretation clarifies that for the purposes of the requirement that an ''arbitration agreement must be in writing'', the term ''in writing'' will, as in most jurisdictions, now include more modern mediums such as e-mail, electronic data interchange, telegram, telex and facsimile.¹ Article 2 of the Interpretation is similarly progressive on arbitrability, holding that where the matters for arbitration are contractual in nature, they may include disputes arising from the execution, validity, modification, assignment, performance, breach, interpretation or rescission of a contract. While this may seem at first blush an uncontroversial point, it is worth bearing in mind that even jurisdictions with an established pro-arbitration jurisprudence, such as England, are still hearing arguments on this issue, see, for example, the recent decision in Fiona Trust & Holding Corp v Yuri Privalov (2007).²

For reasons that will become clear, arbitral institutions (or 'arbitration commissions' as they are termed under the Arbitration Law) have particular importance in the PRC. The two most significant commissions for the foreign user are the China International Economic and Trade Commission (CIETAC) and the China Maritime Arbitration Commission (CMAC). As well as the two main commissions, there are over 170 regional commissions (probably the most well-known of which to foreign investors is the Beijing Arbitration Commission), which are typically formed in co-operation between the local chamber of commerce and the department of justice of the corresponding province, autonomous region or municipality. Of the main two, CIETAC is by far the more relevant for the foreign commercial investor (CMAC, which handles only 20 or so cases a year, tends to deal solely with maritime matters). Formerly known as the Foreign Trade Arbitration Commission, CIETAC (like any other arbitral institution) has issued its own procedural rules, last revised in 2005, and, as might be expected, these rules will be largely familiar to those who have previously read the ICC and UNCITRAL Arbitration Rules. One notable deviation is that the CIETAC Rules unusually require the claimant's notice of arbitration to be a fully formed statement of its claim with supporting evidence.³ While such front-loading does have the advantage of forcing a party to fully consider the merits of his claim before he commences proceedings, it can also serve as a significant impediment when swift action and interim measures are needed.

Also noteworthy is the need for the parties specifically to agree that they may appoint arbitrators from a wider pool than CIETAC's panel of arbitrators, should they wish to do so. Whilst generally championing the autonomous role of the tribunal, much like the ICC Court, CIETAC retains for itself supervisory powers over the ultimate award. It also serves as the ultimate arbiter of any challenges to the tribunal's jurisdiction. Although under the 2006 Interpretation the courts expressly recognise the principle of kompetenz-kompetenz, CIETAC tribunals are only competent to consider their own jurisdiction when CIETAC allows them to do so. This is a potentially important drafting point for arbitration agreements.

The importance of arbitration commissions for PRC seated arbitrations is highlighted by article 16 of the Arbitration Law, which requires that, for an arbitration agreement to be valid, it must indicate the arbitration commission chosen. While this has been relaxed somewhat by the 2006 Interpretation,⁴ it still raises significant concerns for those used to reaching for the more familiar selection of arbitral rules. As a threshold matter it seems clear that ad hoc or unadministered UNCITRAL Rule arbitration agreements will not be valid - at least under internal PRC law - where a PRC arbitral seat is selected. In addition, although it is not made expressly clear, articles 10 and 11 of the Arbitration Law would seem to preclude the selection of a foreign arbitration institution to serve as the commission for a PRC-seated arbitration. This is a significant point of speculation, but as yet there is no definitive guidance. These proscriptions do of course (significantly) narrow the procedural flexibility which most non-Chinese parties would take for granted in drafting their arbitration clauses.

Article 13 of the Arbitration Law specifies that any arbitrator must fulfil at least one of the following five conditions: (i) that they have engaged in arbitration work for at least eight years; (ii) that they have worked as a lawyer for at least eight years; (iii) that they have been a judge for at least eight years; (iv) that they are engaged in legal research or legal teaching in senior positions; or (v) that they have legal knowledge and are engaged in professional work relating to economics and trade, and maintain senior positions or of equivalent professional level. Additionally, tribunal members may be challenged if: (a) the arbitrator is a party involved in the case or a blood relation or relative of the parties concerned or their attorneys; (b) the arbitrator has vital personal interests in the case; (c) the arbitrator has other relations with the parties or their attorneys involved in the case that might effect the fair ruling of the case; or (d) the arbitrator meets the parties concerned or their attorneys in private or has accepted gifts or attended banquets hosted by the parties concerned or their attorneys.⁵ Although on its face such standards do not seem that different from those normally expected in arbitration, a number of foreign parties have been surprised by the willingness of commissions such as CIETAC to appoint their own commissioners and staff as arbitrators on a regular basis. There are no restrictions under PRC law as to the nationality of arbitrators, however CIETAC will generally only accept arbitrators onto its panel if that arbitrator has at least ''a certain'' knowledge of Chinese (though this condition may be observed more in the breach where foreign arbitrators of a certain reputation are concerned). That being said CIETAC's roster of arbitrators stands at over a thousand strong, approximately 25 per cent of which are not residents of mainland China.

It is not unusual for arbitrators in PRC seated proceedings to be called upon to play a dual role. Article 51 of the Arbitration Law provides that the tribunal may perform ''conciliation'' (ie, mediation) prior to making the award. The tribunal is encouraged to take up this extra role by both long Chinese tradition and the CIETAC. Arbitrators can therefore find themselves acting as both arbitrator and mediator. This raises the concerns generally raised whenever the subject of Med-Arb is discussed - namely that the tribunal, to be effective as a mediator, must be willing to discuss frankly the strengths and weaknesses they see in the case with both parties and to receive information in return that they would not normally receive were they sitting purely as arbitrators. Then, should the conciliation fail, the same individuals will be required to again take up the shield of impartiality and put from their minds all that they have learned. Although under the CIETAC Rules (article 40(8)) the Tribunal in such circumstances is prohibited from relying on any ''without prejudice'' or confidential information they have learned, it is hard to see as a practical matter how this can be truly policed or expected. That being said, such schemes are also permitted, and are not uncommon features, in arbitrations seated in Australia, Singapore or Hong Kong.

The majority of changes contained within the 2006 Interpretation affect the enforcement of arbitral awards in the PRC, and more particularly the ability of a party to challenge an award rendered in the PRC. In this regard there are two different regimes applicable, depending on whether the award is considered 'domestic' or whether it is 'foreign related'. The Supreme People's Court has clarified that 'foreign related' disputes included cases in which one or both parties is a foreigner (although a party being a wholly foreign owned enterprise does not meet this criteria, a potentially significant fact given the use of 'WFOEs' in PRC projects), where the contract or other legal relationship was established, modified, or terminated in a foreign country or where the disputed subject-matter is located in a foreign country. Although foreign related arbitrations are domestic in the sense that they are seated in the PRC, the grounds for challenge are largely procedural in nature (eg, invalid arbitration agreement, failure to afford the respondent an opportunity to state its case, a failure to abide by the arbitration rules, or lack of jurisdiction) but also include the right not to enforce where the award would be contrary to social or public interests.

Where a challenge is successfully brought then, since the 2006 Interpretation, the court may take a sophisticated approach. For instance, where only one aspect of an award is successfully challenged then a set aside of the challenged aspect alone is possible. Equally an award may be partially or completely remitted back to the tribunal in certain circumstance, with the court issuing the tribunal with instructions to 're-arbitrate'. To bring a successful challenge however, a party must not only have convinced the court hearing the case but must also have gained the approval of the Superior People's Court. In addition, the 2006 Interpretation also usefully confirms that where a party has attempted to challenge an award and lost, it may not at the enforcement stage raise the same arguments in its defence as made up its challenge application.⁶ Certain other technical avenues of attack (mostly concerning whether a court was bound by the parties express choice of law and forum) were also closed off, further improving the foreign investor's position. These clarifications are consistent with the general view that the Chinese courts will be supportive of arbitration, even (in the majority of cases at least) where an award is to the detriment of a domestic party.

While an arbitration that cannot be brought under the 'foreign-related' category is more vulnerable to challenge (with the court being empowered to examine underlying facts), a certain level of protection may be acquired by the selection of CIETAC Rules as, per the 1995 Notice on Foreign and Foreign Related Arbitrations, a court may only uphold a challenge to a CIETAC conducted arbitration where it has received the approval of the provincial-level court above it to do so.

One unusual aspect of the challenge provisions (which has been maintained by the 2006 Interpretation) is that the court may, when called upon to consider challenge proceedings, request documentary evidence and testimony from the arbitral institution which conducted the proceedings. This clarification (article 30) follows a number of previous attempts by institutions to assert confidentiality as a defence to the handing over of such internal documents. It is not clear whether this should be taken as an indicator that PRC arbitrations are merely private proceedings (per article 40 of the Arbitration Law) and not confidential in the sense understood in jurisdictions such as England.

As to foreign arbitral awards (ie, those rendered in seats other than those in the PRC) the PRC is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards as well as the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

Although there remains some concern about courts outside the major urban areas, reports from and experience in the courts inside those areas show increasing confidence in the regularity of enforcement review. An effort by the Chinese courts to accelerate the enforcement process has begun to be realised, and it is now generally believed to be a fairly expeditious process, particularly in the Beijing courts and most particularly if the award involves only foreign parties or wholly owned foreign entities. The procedural rules for enforcement do not set out a lengthy process, and the court's attitudes are increasingly that the process should not involve lengthy court procedures and that the opportunities for avoiding enforcement should be severely limited. Notwithstanding this progress, there continue to be concerns that Chinese parties outside the major urban areas will be able to delay or frustrate the enforcement process. As a result, most parties accepting arbitration in the PRC are probably advised, at least for now, to seat the arbitration in Beijing or Shanghai and to specify that the courts in the seat city will be a non-exclusive venue for enforcement.

On the subject of enforcement, Hong Kong-rendered awards deserve special mention. Under the Arrangement between the Mainland and Hong Kong Special Administrative Region on the Mutual Enforcement of Arbitration Awards, arbitration awards rendered in Hong Kong are enforceable in the PRC with much the same level of ease and protection as domestic foreign related awards. This means that it is possible to conduct domestic Hong Kong arbitral proceedings (effectively governed by pre-1996 English arbitral law as enacted in Hong Kong) and still enjoy the effective enforcement benefits that would have been achieved if the arbitration was seated in the PRC. The empirical evidence would suggest that this option is becoming increasingly popular for arbitrations between two domestic PRC parties. There is, however, uncertainty as to whether Hong Kong counts as part of China for the purposes of article 128(2) of the PRC Contract Law, and accordingly a question remains as to whether a necessarily domestic PRC arbitration could have its seat in Hong Kong as opposed to mainland China and therefore escape the traditional PRC domestic arbitral regime's restrictions.

Given the limits on the choice of arbitral institutions, and the relative unfamiliarity which still remains with arbitration in the PRC, most foreign investors will be minded, whenever possible, to negotiate an agreement to arbitrate in a more familiar jurisdiction (such as Singapore). However, if this is not possible or is unacceptable to the Chinese counterparty, steps can be taken in drafting to protect the foreign investor's interests and expectations. In this regard completeness is essential. Many issues can be agreed to operate as might typically be expected in international arbitration, but without such specific agreements, the default provisions may lead to less than satisfactory results in the PRC. The first major tip is to ensure that an appropriate arbitration commission is selected to oversee the arbitration. CIETAC should probably be the starting place, given the relatively familiar nature of its rules and the additional protection from challenge that it provides. It may also be well worth specifically setting out the foreign elements of any transaction within the arbitration clause and seeking the other side's agreement that any arbitration should be deemed to be 'foreign related' in the event that there is any room to argue otherwise.

Where CIETAC has been selected, specifically agree that non-panel arbitrators may be appointed by the parties and (if the neutrality of a chairman is important to the parties) specify that the chairman should not be a national of the domicile of either of the parties. Where appropriate, agree that the proceedings should be heard in a language the foreign investor (and its counsel) will be familiar with. Where particular standards of impartiality or independence are important, then specifically import them into the clause. Equally provide for the number of arbitrators and the mechanism for their appointment, otherwise you may be subject entirely to the views of the relevant arbitration commission. If there is a specific need to keep the documents and testimony submitted in any proceedings confidential then, given the current uncertainty in the law, this should be expressly legislated for. Consider carefully whether the parties would feel comfortable with the tribunal assuming a dual mediator-arbitrator role. If not, take advantage of article 40(2) of the CIETAC Rules and opt out.

In conclusion, it can be observed that the 2006 Interpretation has led to increased legal certainty by clarifying a number of points in terms of the form, interpretation and effect of arbitration agreements and the law applicable to the validity of foreign-related arbitration agreements. Further, the new Interpretation has reduced the scope for the technical challenges to arbitration agreements and arbitral awards by resolving a number of jurisdictional and procedural issues. Though Chinese arbitration still lacks the reliance on party autonomy that characterises Western arbitral proceedings (in particular its restrictions on the choice of foreign arbitral institutions), it appears to be continuing to evolve in a direction that most foreign investors would find comfortable.

Notes

1. 2006 Interpretation, article 1.
2. [2007] EWCA Civ 20.
3. CIETAC Rules, article 10.
4. The 2006 Interpretation provides that such a selection can be done by incorporation - eg, a selection of the CIETAC Rules but no express selection of CIETAC as the commission will be saved by article 4(3) of CIETAC's Rules which deem CIETAC to have been expressly chosen as the commission in the circumstance.
5. Arbitration Law, article 34.
6. In other words, challenge proceedings, like the award itself.