China: Arbitration In China — Progress And Challenges

Arbitration in China is a fast-growing industry. There are over 200 arbitration institutions established in China (known as arbitration commissions). In 2010 alone, for example, the arbitration commissions collectively registered almost 80,000 cases,¹ most of which were domestic cases involving purely Chinese parties and Chinese law-governed contracts. Only a small fraction (less than 2 percent) of these cases involved foreign elements, such as a non-Chinese party or a place of performance that is outside of China.

Foreign parties are still wary of agreeing to arbitration in China. These fears are largely centered on the fact that the Chinese courts, as the courts of the seat of the arbitration, will have supervisory jurisdiction over the arbitration and will hear any challenges to an arbitration award issued in such arbitration. Many foreign parties are concerned that the Chinese courts may be more interventionist in arbitral proceedings, or that there may be greater difficulties in defending a successful award against a challenge in a Chinese court by a dissatisfied losing Chinese party.

Foreign parties are generally able to persuade their Chinese counterparties to agree that their contractual relationships should be governed by a law other than the laws of their respective jurisdictions and that their disputes should be settled by arbitration in a mutually acceptable neutral jurisdiction (Hong Kong, London and Singapore are popular compromises). However, there may be commercial or other circumstances where a foreign party may have to agree to arbitration in China.

This article will discuss the various practical issues that a party should consider when agreeing to arbitration in China, so as to ensure that the arbitration agreement would be valid under Chinese law and to adapt the arbitration process to meet its concerns. The China International Economic and Trade Arbitration Commission (CIETAC), established in 1956, is the largest and most prominent of the many Chinese arbitration institutions, and handles the lion's share of the arbitrations with foreign elements. This article will therefore focus on the CIETAC arbitration rules.

Validity of Arbitration Agreements Under Chinese Law

An arbitration agreement that provides for arbitration in China is also likely to be governed by Chinese law. It should, therefore be, valid in accordance with the requirements of the PRC Arbitration Law.² The most important requirements in this respect are³ (a) a clear expression of the parties' intention to submit disputes to arbitration, (b) a description of the matters to be arbitrated, and (c) identification of the arbitration institution selected by the parties to administer arbitrations.

This third element of having to identify a specific arbitration institution in the arbitration agreement is a fairly unique requirement. It means that an arbitration seated in China cannot be an ad-hoc arbitration. Furthermore, it is understood that only Chinese arbitration institutions should be designated for arbitrations seated in China. The PRC Arbitration Law does not expressly limit the choice to only Chinese arbitration institutions. However, Chapter II of the PRC Arbitration Law, which deals with arbitration institutions, only refers to Chinese arbitration institutions, and has been widely interpreted to mean that only a Chinese arbitration institution can be designated if an arbitration agreement is to be valid under Article 16 of the PRC Arbitration Law.

There have been a few instances where parties to arbitrations in China have designated foreign arbitration institutions. However, in the absence of clear Chinese legislative or judicial direction permitting this, designating a foreign arbitration institution to administer an arbitration seated in China runs the risk of having the arbitration agreement declared invalid or having any arbitral award declared unenforceable in China. Therefore, the safest approach, if parties agree to arbitration in China, is to clearly designate in their arbitration agreement a Chinese arbitration institution to administer their arbitration.

The question then becomes which Chinese arbitration institution, out of the 200 or more options, to designate in an arbitration agreement. As noted above, CIETAC is the most frequently chosen arbitration institution for agreements involving a foreign element, whether or not a party, or the shareholder of a party, is a non-Chinese entity.

CIETAC has been hard at work at developing and promoting itself as a credible arbitration institution. It adopted new arbitration rules on February 3, 2012 which came into effect on May 1, 2012 (the CIETAC Rules). These new rules seek to align the CIETAC arbitration process with contemporary international arbitration standards and practices. Nevertheless, they still contain some elements which can be described as Chinese arbitration characteristics, such as opportunities for greater court involvement and conciliation.

On balance, the new CIETAC Rules should be viewed as a welcome development for parties who have to arbitrate in China. However, parties should be aware that they can specify changes to the processes contained in the CIETAC Rules by express drafting in their arbitration agreement.

Practical Issues Regarding CIETAC Arbitration Procedure

Article 4(3) of the CIETAC Rules permits parties to modify the CIETAC Rules, except where such modifications conflict with a mandatory provision of the law applicable to the arbitration. Therefore, if a foreign party has to agree to arbitration in China, it should designate CIETAC as the arbitration institution and then request deviations from the CIETAC Rules in order to tailor the process to address any specific concerns with such process.

Number and Appointment of Arbitrators

A fundamental concern for parties to any arbitration is the composition of the arbitration tribunal. Parties to an arbitration governed by the CIETAC Rules should be aware of the default position in such rules regarding the number of arbitrators and who can be appointed as arbitrators.

The parties to an arbitration agreement would usually specify the number of arbitrators on the tribunal (either one or three arbitrators). Under Article 23 of the CIETAC Rules, if the parties fail to specify the number of arbitrators, the default position is that the tribunal will comprise three arbitrators.

The default position under the CIETAC Rules is unusual for two reasons. First, many rules of international arbitration institutions, such as those of the ICC, LCIA and SIAC, provide for a one-arbitrator tribunal in the absence of an agreement by the parties. Second, these other rules also provide the arbitration institution with discretion to appoint a different number of arbitrators if it deems it appropriate. In contrast, the CIETAC Rules provide for a fixed default position of three arbitrators and do not give CIETAC any discretion to vary this default number.

As such, if a party to a CIETAC arbitration strongly believes that having only one arbitrator is appropriate, then the arbitration agreement must specify that the arbitration tribunal is to be made up of only one arbitrator.

The other aspect of the composition of the tribunal is who can be nominated or appointed as arbitrators. Article 24 of the CIETAC Rules requires the parties to nominate arbitrators from its Panel of Arbitrators, unless the parties have expressly agreed that they can nominate arbitrators from outside the CIETAC panel.

The current CIETAC Panel of Arbitrators was appointed on May 1, 2011 and comprises 998 individuals. There are 716 arbitrators from mainland China, 64 from Hong Kong, Macau and Taiwan, and the remaining 218 arbitrators are domiciled in other countries around the world.

A foreign party to an arbitration agreement calling for CIETAC arbitration in China should always specify in the agreement that a party can nominate arbitrators from outside CIETAC's Panel of Arbitrators, and that the chairman of the tribunal can also be nominated or appointed from outside the panel. This is to preserve flexibility for the foreign party so that it is not constrained by the CIETAC panel. However, it should be noted that the CIETAC Rules do state that an arbitrator nominated from outside the CIETAC panel is subject to confirmation by the Chairman of CIETAC in accordance with law. In this regard, it is reassuring that Article 67 of the PRC Arbitration Law allows a Chinese arbitration institution such as CIETAC to appoint foreigners with professional knowledge in fields such as law, economics and trade, or science and technology, as arbitrators.

A final aspect regarding the composition of the tribunal is with respect to the nationality of the chairman of a three-arbitrator tribunal. A Foreign Invested Enterprise (FIE) entering into an arbitration agreement with a Chinese counterparty may wish to specify in the arbitration agreement that the chairman should not be a Chinese national or a national of the jurisdiction of the foreign investor in the FIE. Without such a provision, there is a possibility that where the parties do not agree on the nomination of the chairman, CIETAC will simply appoint a Chinese national as the chairman of the tribunal.

Language

The language in which an arbitration is conducted may also be of concern to the parties to the arbitration. In particular, a foreign party involved in a CIETAC arbitration in China usually wants to ensure that the proceedings are conducted in a language it can follow. In this regard, the change to the CIETAC Rules regarding language is welcome.

Previously, the old CIETAC arbitration rules provided that in the absence of any agreement among the parties, the arbitration will be conducted in the Chinese language. Now, Article 71 of the CIETAC Rules is more flexible as it permits CIETAC to designate Chinese or any language having regard to the circumstances of the case. It is therefore possible, at least in theory, for CIETAC to designate a language other than Chinese to be the language of the arbitration.

Nonetheless, if a party to an arbitration agreement calling for CIETAC arbitration wants the proceedings to be conducted in a specific language, it should expressly provide for this in the arbitration agreement. Importantly, Article 71 of the CIETAC Rules states that the parties' agreement on the language of the arbitration shall prevail.

It is common to see arbitration agreements calling for CIETAC arbitration to require, as a compromise, arbitration proceedings to be conducted in dual languages (typically English and Chinese). This is permissible under the CIETAC Rules. However, it should be noted that Article 72(4) of the CIETAC Rules specifically provide that where the parties agree to use two or more languages for the arbitration, CIETAC is entitled to charge extra in respect of the costs of the arbitration.

Consolidation of Proceedings

The CIETAC Rules now permit the consolidation of two or more arbitrations where either a party or CIETAC proposes such consolidation and all the parties agree (see Article 17 of the CIETAC Rules). This is a welcome revision from the old CIETAC arbitration rules which were silent on this issue. However, it should be noted that with respect to the ability to consolidate arbitration proceedings, the CIETAC Rules are still more conservative than the new ICC arbitration rules that came into effect five months before the CIETAC Rules. Under the CIETAC Rules consolidation of multiple proceedings is permitted only where all the parties agree, whereas under Article 10 of the ICC arbitration rules, consolidation is still possible even if not all the parties agree, provided certain conditions are satisfied.

As a related matter, the rules of major arbitration institutions allow for the joinder of third parties to arbitration proceedings; see, for example, Article 7 of the ICC Rules, Article 22.1(h) of the LCIA Rules, and Article 24(b) of the SIAC Rules. However, the CIETAC Rules are silent on the issuer of joinder of third parties. As such, unless the parties expressly confer on the tribunal the power to join third parties to an existing proceeding, a party to a CIETAC arbitration will not have the possibility to join a third party to the arbitration.

Conservatory and Interim Measures

Previously, tribunals operating under the old CIETAC arbitration rules did not have any ability to grant conservatory or interim measures. Now, under Article 21(2) of the CIETAC Rules, tribunals do have the power to order any interim measures it deems necessary or proper upon the application of a party to the arbitration. However, a tribunal under the CIETAC Rules still does not have the power to order conservatory measures. Article 21(1) of the CIETAC Rules provides that any application for conservatory measures has to be forwarded to the competent court for decision.

Conciliation (Article 45)

A unique feature of the CIETAC Rules not found in any of the rules of the major arbitration institutions is the ability of a tribunal to conciliate the dispute. Article 45 of the CIETAC Rules expressly allows a tribunal to conciliate the dispute where the parties agree to attempt conciliation. Furthermore, the CIETAC Rules provide that if conciliation fails, the same tribunal shall resume the arbitration proceedings and issue an arbitration award.

The ability of the same panel to act as both conciliator and as arbitrator is controversial. This is because conciliation and arbitration have different approaches and objectives, and the panel qua conciliator may learn information and the intentions of a party that it may not otherwise be able or entitled to discover in an arbitration proceeding, and may be unduly influenced by such knowledge when deciding the arbitration.

Under the CIETAC Rules, conciliation is not possible if a party does not agree. However, as a practical matter, a party may fear that if it rejects a tribunal's recommendation to attempt conciliation, it may appear unreasonable or as having a weak case. The CIETAC Rules further provide that if the parties are willing to conciliate their dispute but do not wish the existing tribunal to conciliate the dispute, then, if the parties agree, CIETAC may assist the parties to conciliate the dispute. As such, a party to a CIETAC arbitration agreement may wish to specify upfront that if the parties agree to conciliation, any conciliation cannot be conducted by the tribunal hearing the arbitration.

Dispute between CIETAC and its Shanghai and Shenzhen Sub-Commissions

CIETAC has four sub-commissions in China. These are in Chongqing, Shanghai, Shenzhen and Tianjin. These sub-commissions together with the headquarters in Beijing constitute a single arbitration institution. Parties can agree to submit their dispute to CIETAC or a sub-commission of CIETAC. These sub-commissions can accept and administer arbitration cases with CIETAC's authorization.

This arrangement with respect to the Shanghai and Shenzhen sub-commissions has now been thrown into disarray. These two sub-commissions refused to adopt the CIETAC Rules which came into effect on May 1, 2012. It is believed that the sub-commissions viewed the new CIETAC Rules as an attempt to consolidate power at the CIETAC headquarters in Beijing and to diminish the role of the sub-commissions in administering arbitrations. For example, Article 47(4) of the CIETAC Rules now provides that the CIETAC seal has to be affixed to an arbitral award before it can be issued. This means that the seals of the Shanghai or Shenzhen sub-commissions are no longer sufficient for the issuance of any arbitral award.

On August 1, 2012, CIETAC announced that it is suspending with immediate effect the authorization of the Shanghai and Shenzhen sub-commissions to accept and administer arbitrations. These two sub-commissions then retorted that they are independent arbitration institutions established with the approval of their respective local governments. Finally, on December 31, 2012, CIETAC announced that the authorization of the Shanghai and Shenzhen sub-commissions to accept and administer arbitrations is terminated, and that their declaration of independence is null and void by law. For good measure, CIETAC further stated that these two sub-commissions are forbidden to conduct any further arbitration activities in the name of either the CIETAC Shanghai sub-commission or the CIETAC South China sub-commission (the formal name of the Shenzhen sub-commission).

The upshot is that parties should now avoid specifying in their arbitration agreements either the CIETAC Shanghai sub-commission or the CIETAC South China sub-commission as the applicable arbitration institution. Parties to an arbitration agreement can always specify either Shanghai or Shenzhen as the place of arbitration, but they should specify CIETAC as the applicable arbitration institution.

Footnotes

1. 2010 Annual Report of the Legislative Affairs Office of the State Council on the Caseload of Chinese Arbitration Commissions.

2. The Arbitration Law of the People's Republic of China, which entered into force on September 1, 1995 (PRC Arbitration Law).

3. See Article 16 of the PRC Arbitration Law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.