The Asia Pacific Arbitration Review 2008

Section 2: Country Overviews

China

Peter Thorp, Huawei Sun

Allen & Overy LLP

China's rapid economic development continues unabated in 2008 and much of this growth has been driven by inward foreign investment and other business transactions between Chinese and foreign companies. A natural consequence of all this economic activity has been a steady rise in the number of disputes between Chinese and foreign parties. Arbitration is frequently preferred to litigation for the resolution of these disputes, for the usual reasons of neutrality, flexibility, confidentiality, costs and, most importantly, greater ease of cross-border enforcement.

If arbitration is chosen, the parties must then decide whether to conduct arbitration in China or overseas, which will often be a subject of tough negotiation. Chinese parties usually prefer to arbitrate within China, whereas foreign parties will often try to insist on arbitration in a neutral and, in their eyes, fairer arbitration environment outside of China. In recent years China has made considerable efforts to make its arbitration environment more attractive, including improvements to the system for enforcement of arbitral awards through the PRC courts. However, much remains to be done, in terms of both arbitration law and practice, before Chinese arbitration can reach a truly international level. This article looks at some of the recent trends in Chinese arbitration and prospects for further reform and development.


Increase in caseload and competition among Chinese arbitration commissions

Until 1996, the China International Economic and Trade Arbitration Commission (CIETAC) had a virtual monopoly over 'foreign- related' arbitrations in China.1 However, this monopoly was abolished when the State Council issued a notice in 1996 allowing local arbitration institutions to handle foreign-related arbitrations. In response to this development, CIETAC adopted new arbitration rules in 2000 and extended its jurisdiction to domestic cases. The number of arbitration institutions in China has been growing rapidly in recent years, and a rough estimate shows that China now has more than 180 arbitration institutions. There has been impressive growth in the caseload of the local arbitration commissions, notably the Beijing Arbitration Commission (BAC) and the Shanghai Arbitration Commission (SAC). However, most of their cases still tend to be domestic, whereas CIETAC has maintained its leading position in international arbitration, notwithstanding that the number of CIETAC's foreign-related cases has been overtaken by that of domestic cases. However, it should be noted that many 'domestic' cases heard by CIETAC or local arbitration commissions actually involve foreign-invested enterprises (FIEs), which are treated as domestic entities since they are incorporated in China.


Hong Kong and Singapore are increasingly popular choices for resolving China-related disputes

Hong Kong is being increasingly chosen as the venue for the resolution of China-related disputes, and the Hong Kong International Arbitration Centre (HKIAC) reports significant increases in the number of cases involving one or more Chinese parties, with over 100 such cases accepted in 2006 alone.

For foreign parties, the attraction of Hong Kong is that, although the territory reverted to Chinese sovereignty in 1997 and became a Special Administrative Region of the PRC, it has retained its own English common law-based legal system. The Hong Kong Arbitration Ordinance closely follows the UNCITRAL Model Law and Hong Kong courts are supportive of the arbitration system. Furthermore, under an arrangement entered into between Hong Kong and mainland China in 1999, Hong Kong awards are enforceable in the PRC courts subject only to limited grounds for non-enforcement similar to those available under the New York Convention. Hong Kong arbitration is therefore considered by foreign parties to be a fair and neutral mechanism for the resolution of Chinese disputes. For Chinese parties, the main attraction may be Hong Kong's proximity and cultural closeness.

Further, according to HKIAC's statistics, there have been quite a number of HKIAC-administered cases involving purely mainland parties. For example, there were 18 such cases in 2006.

Singapore is also an increasingly popular choice of venue for the resolution of China-related disputes, with the Singapore International Arbitration Centre (SIAC) playing a leading role. The same factors that explain the Hong Kong's growth as a venue for Chinarelated arbitrations (common law system, arbitration-friendly courts, fair and neutral venue, cultural and geographical proximity) are also applicable to Singapore. Singapore awards are directly enforceable in PRC courts under the New York Convention.

Enforcement - the prior reporting system established by the SPC and recent amendment to the Civil Procedure Law A major area of concern for foreign investors in China has been the enforceability of arbitral awards in China, whether the award has been rendered by a Chinese or an overseas arbitral institution. In an effort to improve the record for enforcement of arbitral awards in China, the Supreme People's Court (the SPC) introduced, in the 1990s, a system pursuant to which, where the local Intermediate People's Court is minded to refuse enforcement of an arbitral award, the court is obliged to pass that decision up to the provincial level Higher People's Court for further review, and then up to the SPC for final review. Only with the final approval of the SPC can the Intermediate People's Court refuse to recognise or enforce the award. This system aims to combat local protectionism and improve China's enforcement record.

Although accurate statistics on enforcement are difficult to come by, reports from practitioners indicate that enforcement is improving, particularly in major cities such as Beijing and Shanghai and particularly if the award involves foreign parties or FIEs.

The enforcement system has been further strengthened by a recent amendment to the PRC Civil Procedure Law, which will take effect on 1 April 2008. First, the time limitation for bringing an enforcement action has been uniformly extended to two years as compared to one year for individuals and six months for entities under the old law. Secondly, if the people's court where enforcement is sought has not ruled to effect enforcement within six months of an application for enforcement being made, the applicant may now apply to the court of higher level for enforcement. The court at the higher level may order the people's court to take enforcement action within a certain time limit, take the enforcement action by itself or designate another court to take enforcement action. It remains to be seen whether these new provisions will resolve the frequent delays in enforcement that are still being experienced under the current system.


CIETAC's revised Arbitration Rules of 2005

CIETAC's arbitration rules and practices have been criticised over the years for failing in various ways to meet international standards, and many foreign parties have lacked confidence that CIETAC tribunals would resolve their China-related disputes in a fair, unbiased and independent manner. In response to those criticisms and concerns, and faced with increasing competition from other arbitration institutions, both domestic and international, CIETAC in 2005 implemented the most comprehensive revision of its arbitration rules to date (the CIETAC Rules 2005). The aim of the revisions was to improve transparency and procedural flexibility and promote party autonomy in CIETAC arbitrations, and thereby make CIETAC a more attractive venue for the resolution of both international and domestic disputes. Some of the more significant changes introduced by the CIETAC Rules 2005 and further recent changes to CIETAC's practices are discussed below.


Arbitrators' independence and impartiality

The independence and impartiality of CIETAC arbitrators has long been a cause of concern for foreign parties. The CIETAC Rules 2005 seek to address that concern by requiring arbitrators to disclose to CIETAC in writing before or during the proceedings any matters which may give rise to reasonable doubts as to their independence and impartiality. CIETAC, in turn, is required to inform the parties of this disclosure.

CIETAC has also published a Code of Ethics for Arbitrators and Provisions on Supervising the Conduct of Arbitrators (the Provisions). Among other things, the Provisions include three nonexhaustive lists setting forth detailed guidelines for arbitrators on turning down appointments, making disclosure of possible conflicts of interest and withdrawing from cases under various circumstances. The Provisions take into consideration the IBA Code of Ethics but have tailored them for the Chinese environment. The aim of the Provisions is to prohibit ex parte communications between a party and its appointed arbitrator, to prevent undue influence by parties or other sources on the decisions of arbitrators and to require more extensive disclosure by arbitrators of possible conflicts of interest. With these new measures in place, CIETAC has reported an increasing number of the cases in which arbitrators are being challenged by the parties. Voluntary disclosures of possible conflicts of interest and withdrawals from proceedings by arbitrators have also increased. Despite the delays or additional costs sometimes thereby caused, the increased scope for disclosures of conflicts of interest and challenges of arbitrators should work to increase confidence in the fairness of CIETAC arbitration.


Neutrality of arbitral tribunal

In CIETAC arbitrations, the presiding arbitrator in a three-person tribunal, and the sole arbitrator if the parties choose to have only one arbitrator, is appointed by the chairman of CIETAC. CIETAC has been criticised in the past for routinely appointing a Chinese national as the sole or presiding arbitrator, thus resulting in tribunals at least perceived to afford a 'home-team' advantage to Chinese parties. The CIETAC Rules 2005 attempt to resolve this problem by allowing parties to choose arbitrators outside the CIETAC panel list and submitting a list of up to three recommended candidates as presiding arbitrator.2 However, the final decision on the appointment of the presiding arbitrator still remains with the chairman of CIETAC. Foreign parties will therefore often insist in their contracts that the presiding arbitrator should not be of the nationality of either of the parties. Possibly in response to that trend, CIETAC has recently adopted an experimental approach under which the parties can agree on and pay separately the presiding arbitrator's compensation. This would possibly enlarge the pool of the potential international candidates for appointment as the presiding arbitrator, as until now CIETAC has only been able to afford to appoint foreigners living in China or those living overseas but willing to accept appointments for remuneration well below international levels. However, without the permanent lifting of the government's 'revenue and expense control' over CIETAC's finances (discussed in more detail below), CIETAC's ability to attract foreign arbitrators will probably continue to be limited.


Appointment of CIETAC staff as arbitrators

CIETAC has included most of its senior staff members on its panel of arbitrators. These staff members are well-experienced in arbitration matters, having acted as arbitrators' assistants and case managers. However, their status as CIETAC staff gives rise to doubts about their independence and impartiality. Currently, CIETAC will not grant a challenge if the challenge is made on the sole basis that the appointed arbitrator works for CIETAC.

However, CIETAC has adopted internal measures to at least partly address the issue. Since 2005, CIETAC has expressly forbidden its staff members from accepting appointments as partynominated arbitrators. CIETAC has also been more cautious about appointing its staff members as presiding arbitrator. In most cases, CIETAC will now appoint its staff members as arbitrators only if the amount of dispute is small and if one party fails to appoint an arbitrator within the specified time limit. CIETAC also has internal restrictions on the number of times that the same person can be appointed as arbitrator.

Moreover, sources indicate that CIETAC is currently considering abolishing altogether the practice of appointing its staff members as arbitrators.


Removal of restrictions on recovery of costs

The CIETAC Rules 2005 have removed the restrictions on the percentage of costs the winning party could recover, which were previously capped at 10 per cent of the amount awarded. Under the new rules, a tribunal may now decide that the losing party shall compensate the winning party for all expenses reasonably incurred, taking into account such factors as the outcome and complexity of the case, the workload of the winning party and its representatives and the amount in dispute.3


The SPC issues an interpretation in 2006 to clarify enforceability of common types of arbitration clauses

One of the most salient features of China's arbitration law is that, for an arbitration clause to be valid, it must designate an arbitral institution.4 Problems frequently arise as to what is considered a valid arbitral institution. In order to clarify that and several other outstanding issues, the SPC in 2006 issued an Interpretation on Certain Issues Relating to the Application of the Arbitration Law (the 2006 SPC Interpretation), which consolidated various previous judicial notices and draft interpretations.

The 2006 SPC Interpretation is significant in that it should encourage consistency in the rulings of Chinese courts on the validity of arbitration clauses and bring this area more into line with international practice. For example, an arbitration clause that does not explicitly refer to an arbitral institution will now be valid if one can reasonably infer the name of the arbitration institution from the wording or reference to the governing arbitration rules.5

Furthermore, although ad hoc arbitration conducted in China will continue to be invalid, the 2006 SPC Interpretation confirms clearly that ad hoc arbitration awards made outside China will be enforceable in China. The basis for this is the confirmation in the 2006 SPC Interpretation that foreign law will be applied in determining the validity of the arbitration clause if the place of arbitration is outside China.6


Mutual enforcement of arbitral awards between the Mainland and the Macau Special Administrative Region

Following conclusion of the arrangement with the Hong Kong in 1999, the SPC issued on 12 December 2007 a notice promulgating an arrangement (the Macau Arrangement) reached with the government of the Macau Special Administrative Region (Macau) on the mutual enforcement of arbitral awards between the PRC and Macau, effective from 1 January 2008. Similar to the previous arrangement between mainland China and Hong Kong, the Macau Arrangement has provided a legal basis for mutual recognition and enforcement of arbitral awards made respectively in the PRC and Macau after the handover of Macau to China on 20 December 1999.


Arbitration of financial disputes

In China as elsewhere, courts have been a traditional forum for resolving financial disputes, due to the relatively simple nature of many financial disputes (essentially debt collection) and the plaintiff 's desire for a fast and clear-cut judgment. However, with the growing complexity of financial disputes and the promotion internationally of arbitration as a viable mechanism for resolving such disputes, arbitration should become an increasingly important alternative for resolving a wide range of financial disputes in China.

In anticipation of that trend, CIETAC in 2005 revised its Financial Disputes Arbitration Rules. These rules provide for a fast track method for resolving financial disputes. However, the actual number of cases referred to CIETAC under these rules to date has been very limited.

On 18 December 2007, a court of arbitration specialising in financial disputes was also inaugurated in Shanghai, marking a milestone in the city's continued efforts to establish itself as an international financial centre. The court will provide a pool of financial and legal experts from China and overseas to act as arbitrators in financial disputes, for example disputes involving new financial derivatives products.


Future reform of China's arbitration system and arbitration institutions

One cause for concern among foreign investors is whether PRC arbitration institutions are really free from outside political and other influence. Article 14 of the PRC Arbitration Law states that an arbitration commission shall be independent of administrative bodies and shall have no subordinate relationship with administrative bodies. However, given the long history of government involvement in the establishment and management of arbitration institutions, administrative authorities still have considerable say in the management of arbitration institutions in China. For example, many local arbitration commissions are led by persons holding concurrent government positions. Although CIETAC is in theory a non-governmental organisation, its key management personnel are all appointed by the China Council for the Promotion of International Trade (CCPIT), whose leadership is in turn appointed by the Central Government.

Furthermore, most Chinese arbitration institutions are financially dependent on the government. According to various notices jointly issued by the Ministry of Finance, the State Development and Reform Commission, the Ministry of Supervision and China National Audit Office, arbitration fees fall into the category of administrative and public entity fees and are thus subject to revenue and expense control. This means that arbitration fees collected by arbitration institutions must be submitted to the Ministry of Finance while the expenses of arbitration institutions and arbitrators' remuneration shall be paid out from the state budget after approval by the Ministry of Finance. As a result, Chinese arbitration institutions have no real control over the use of the arbitration fees that they collect. This has hindered the development of those institutions and the proper integration of Chinese arbitration into the international arbitration system.

There were various discussions and proposals at PRC government level regarding reform of China's arbitration institutions during 2007. The BAC, a forerunner of arbitration reform in China, conducted a questionnaire survey among PRC arbitration institutions and practitioners and came up with a reform proposal that it submitted to the Legislative Affairs Office of the State Council in July 2007. The proposal is designed to strengthen independence and transparency of arbitration institutions in various aspects such as financing, staffing, operation and decision-making. At the same time, increasing voices have focused on the unreasonableness of 'revenue and expense control'. CIETAC has been in active consultation with the Ministry of Finance to resolve this issue, which has hindered the independence of CIETAC and also raised concerns as to its ability to properly compensate its arbitrators and attract experienced international arbitrators to accept appointments to its arbitral tribunals.


Prospects for amending the PRC Arbitration Law

The PRC Arbitration Law, which came into effect in 1995, was the first attempt to unify all the disparate regulations and decrees that previously governed arbitration in China and was revolutionary at the time of its enactment. However, the Arbitration Law has been increasingly unable to meet the demands of parties for an arbitration system capable of resolving complex commercial disputes in a fair and professional manner. There has therefore been much discussion in PRC arbitration circles about the need to enact a major overhaul of the Arbitration Law if China truly wants to play a major role in international arbitration. The main areas that are seen to require amendment include the following:


  • opening the Chinese market to foreign arbitration institutions such as the ICC;
  • allowing ad hoc arbitration to be conducted in China;
  • abolishing compulsory panels of arbitrators;
  • removing the differences between foreign-related and domestic arbitrations in relation to setting aside or denying enforcement of arbitral awards;
  • expanding acceptance of the internationally accepted principle of Kompetenz-Kompetenz so that the arbitral tribunal can decide on its own jurisdiction (under the CIETAC Rules 2005, CIETAC still has the power to decide whether to make that determination itself or to delegate the decision to the tribunal);
  • granting arbitrators more autonomy in deciding the conduct of the arbitral proceedings; and
  • allowing arbitral tribunals to grant interim relief (at present, any such application must be referred by the arbitration institution to the courts).

Despite repeated calls by arbitration practitioners for urgent reform and earlier signs of high-level support for amendment, recent indications are that revision of the Arbitration Law is not currently high on the legislative agenda of the National People's Congress.


Outstanding issues

Despite the real improvements introduced by the various reforms discussed above, several important issues remain to be addressed. First, it is still not clear whether arbitrations administered by foreign arbitral institutions, such as the ICC, can be conducted in China. There is disagreement as to whether the term 'arbitration commission' in the PRC arbitration law refers only to Chinese arbitration institutions or also encompasses foreign arbitration institutions. Without that clarification, any ICC arbitration award rendered in China would always be vulnerable to challenge in a PRC court sympathetic to the local respondent.

Second, the status of arbitrations conducted outside the mainland involving only mainland parties, in Hong Kong or elsewhere, remains uncertain. The PRC Contract Law provides that parties to a foreign-related contract may submit their disputes to a Chinese or a foreign arbitration institution. It has long been the opinion of Chinese courts that a purely domestic dispute without a foreign element may only be arbitrated before a Chinese arbitration institution. This means the status and enforceability of awards of arbitrations involving purely domestic parties before the HKIAC, for example, remains uncertain.

Third, the scope of the right of lawyers who work for foreign law firms, even those of Chinese nationality or foreign lawyers based in China, to represent clients in arbitrations conducted in China, remains uncertain. CIETAC appears supportive of participation in CIETAC arbitrations by lawyers from foreign law firms, but the PRC Ministry of Justice has made it clear in various notices that those lawyers can only do so to the extent that they do not make pronouncements on matters of PRC law.

* * *

China has made great strides in recent years to bring its arbitration laws and practices more in line with international standards.

CIETAC has enacted a major overhaul of its rules and has made certain internal changes that have improved the transparency and professionalism of its practices. The SPC has also contributed to arbitration reform through various useful clarifications of certain points of PRC arbitration law, in particular through the 2006 SPC Notice. However, further clarifications and reforms need to be carried out if China wants to reach its goal of being a true venue of choice for the resolution of China-related international disputes.


Notes

  1. Foreign-related arbitrations cover disputes involving contracts where one of the parties is a foreign legal entity, part of the contract is performed outside of China, or the subject matter of the contract is outside of China.
  2. Articles 21 and 22 of the CIETAC Rules 2005.
  3. Article 46 of the CIETAC Rules 2005.
  4. Article 16 of the PRC Arbitration Law.
  5. Articles 3 and 4 of the 2006 SPC Interpretation.
  6. Article 16 of the 2006 SPC Interpretation.

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