China: China - Trends For 2014

Last Updated: 9 June 2014
Article by David Toscano

The year 2014 is the Lunar Year of the Horse which is traditionally thought to be a zodiac sign of high activity and energy. But what will this year hold for those working on projects in and with China? We look ahead at the key areas in construction, investment and arbitration.

Closer ties for China and the UK

In 2013, the UK government led a charm offensive in China with both the Chancellor and the London Mayor taking delegations to the Far East to improve bilateral investment ties. The value of this relationship to the recovering UK economy was recently confirmed by the Chinese Ambassador who noted a record high of over £40 billion in bilateral trade in 2013. With an increase in UK exports to China of almost 14% last year and China directly investing over £7 billion in the UK over 2012-13, it is clear that projects both here and in China will continue to be supported by both countries.

UK contractors and designers are leading large projects in China this year, such as the Atkins designed "Pearl of the North" 565m-tall skyscraper in Shenyang and the Suzhou sports and leisure complex being built by Mott Macdonald incorporating a 45,000-capacity stadium.

Equally, Chinese expertise and investment will be driving many 2014 UK projects. High-profile plans by the telecoms giant Huawei to open a £125m UK research and development centre and the 49% stake in the EDF Hinkley nuclear plant taken by the Chinese Nuclear Power Group have made headlines.

Perhaps less controversial but equally important is the Manchester "Airport City" project as it is set to create 16,000 jobs in the area and pave the way for direct flights to China. The project will be led by a joint venture of Manchester Airports Group, Beijing Construction Engineering Group, Carillion and the Greater Manchester Pension Fund, delivering a new 61-hectare business district featuring 465,000 square metres of offices, shops and green space.

EU-China bilateral investment treaty

The EU has also sought to cement its relations with China Sino-relations by announcing in November 2013 that it would begin talks on a bilateral investment treaty ("BIT"), the first ever stand-alone EU investment agreement.

Investment between the EU and China is starting from a low base as it accounted for less than 3% of each of their total overseas direct investment in 2012. However, China's investment in the EU grew by over 100% in 2013 and it is expected that the figure will reach over £600 billion by 2020, from a base of less than £500 million prior to 2008.

Negotiations on the EU-China BIT will continue into 2014 with the key aim to seek broader access for investment in China for EU companies, particularly those in the construction, energy, telecommunications and rail sectors. The EU-China BIT will consolidate 27 existing EU member state BITs into a single comprehensive agreement and the hope is that it will provide a more secure and simpler framework for investment protection including Investor-to-State dispute settlement provisions.

While the EU-China BIT will take two or three years to finalise, negotiations in 2014 may provide an insight into the role to be played by bilateral ties in the construction and energy sectors.

Uncertainty in CIETAC arbitration

The year 2014 is also likely to provide developments in the ongoing public dispute running in the Chinese international arbitration market. In April 2012, the China International Economic and Trade Arbitration Commission ("CIETAC") issued new arbitration rules which led to an open conflict between its Beijing, Shanghai and Shenzen sub-commissions. The new 2012 rules provided that any cases arising under CIETAC's standard arbitration clauses would be administered by CIETAC Beijing. This included clauses where parties specifically agreed to submit their dispute to arbitration in Shanghai or Shenzen, and even if the arbitration clause was agreed before the 2012 rules came into force. In response, the Shanghai and Shenzen offices initially announced they would refuse to implement the 2012 rules, and then that they would split from the CIETAC umbrella, leading to Beijing first suspending and then terminating their authority to accept and administer arbitration cases. This of course placed parties with CIETAC arbitration clauses in their contracts in a very uncertain position, particularly as to the enforceability of any award they might obtain through the Shanghai and Shenzen offices.

Those sub-commissions countered by declaring themselves as independent arbitration institutions approved and established by the municipal governments of Shanghai and Shenzen, and rebranding as the Shanghai International Arbitration Centre ("SHIAC") and the Shenzen Court of International Arbitration ("SCIA").

This uncertainty gave rise to jurisdictional challenges in lower courts in China, with conflicting decisions being issued to add to the confusion. For example, in May 2013, the Intermediate People's Court of Suzhou refused to enforce a SHIAC arbitral award following the Shanghai name change, while the High People's Court of Zhejiang held that a SHIAC award was enforceable notwithstanding the change.

China's highest court, the Supreme People's Court of China (the "SPC"), sought to control the situation by issuing a Notice in September 2013 that any lower court hearing a case arising out of the former CIETAC sub-commissions of Shanghai or Shenzen must report to the SPC before making any decision. Lower courts in China are likely to be asked to review the validity of a CIETAC arbitration agreement or to hear an application to set aside or not enforce an award made by CIETAC, SHIAC or SCIA.

The SPC Notice directs the lower court to report its intended decision to the SPC on a "level by level" basis, i.e. to all court levels between the court where the application is made and the SPC. The SPC will then give its opinion which the lower courts will follow. Interestingly, it appears that this reporting will be required in all cases that arise out of the CIETAC split, not simply those where the court might be minded to nullify a CIETAC arbitration clause or a CIETAC, SHIAC or SCIA award.

Both SHIAC and SCIA now have their own arbitration rules with modern features such as allowing third-party participation in proceedings (SHIAC) and the joinder of additional parties (SCIA). Each forum employs large panels of arbitrators including over a third from outside China, showing a clear international focus.

The key point for parties contracting in China is to use the correct model arbitration clause for CIETAC, SHIAC or SCIA. All three institutions have published new model arbitration clauses which are available on their respective websites. If parties already have contracts with CIETAC arbitration clauses, they should consider amending the clause to minimise the risk of jurisdictional challenges in the Chinese courts.

With their cooperative at an end, it is expected that the three institutions will use 2014 to stamp their own mark on the international arbitration market by conveying the individual qualities they bring to resolving disputes. This is likely to increase competition for parties' business which can only continue to improve China's arbitration reputation.

The year 2014 certainly looks like another important year for China. Watch this space.

International Quarterly is produced quartely by Fenwick Elliott LLP, the leading specialist construction law firm in the UK, working with clients in the building, engineering and energy sectors throughout the world.

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.

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David Toscano
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