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The Changing Landscape of International Arbitration in China

The Changing Landscape of International Arbitration in China

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Ever since the Arbitration Law of the People’s Republic of China (the “Chinese Arbitration Law”) was enacted in 1994, the landscape of Chinese commercial arbitration has gone through a profound change. At the end of 2017, there were 251 arbitration institutions in China. With experience gained over the past two decades, some institutions, such as the Beijing Arbitration Commission/ Beijing International Arbitration Center (the “BAC/BIAC”), have won a reputation for high quality within the international arbitration community and have become popular for cross-border dispute resolution among both Chinese and foreign parties. Parties who intend to settle cross-border disputes by arbitration in China are well-advised to learn more about this important option.

Identifying International Arbitration under Chinese Law

As in many other jurisdictions, arbitration in China is divided into two kinds: domestic arbitration and foreign-related or international arbitration. According to the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the “Law of the People’s Republic of China on the Law Applicable to Foreign-Related Civil Relationships,” a dispute will be treated as foreign-related if it contains a “foreign element,” namely: [a] at least one of the parties is “foreign”; [b] at least one of the parties’ residence or primary place of business is located outside of China; [c] the subject matter of the contract is outside of China; or [d] there are other legally relevant facts as to the occurrence, modification, or termination of civil rights and obligations which occurred outside of China. It should be noted that Foreign Invested Enterprises will be treated as domestic parties under this judicial interpretation. 

The concept of “foreign element” is important in the context of commercial arbitration because Chinese law does not permit parties to submit their disputes for arbitration abroad if no “foreign element” exists. However, the Supreme People’s Court (the SPC) issued its “Opinions on Providing Judicial Protection for the Construction of Pilot Free Trade Zones” (the “Opinion”) on December 30, 2016, in which it stated that if wholly foreign-owned enterprises registered in Free Trade Zones (FTZs) agree with each other to submit commercial disputes for overseas arbitration, the relevant arbitration agreements shall not be invalidated on the ground that the dispute does not involve foreign elements. It is believed that the SPC has adopted a broad interpretation of the “foreign elements test” in arbitration between companies registered in a FTZ.  

The differences between domestic arbitration and international arbitration are relevant because Chinese courts apply different legal bases for each when deciding whether or not to set aside or refuse to enforce an award. In addition, the procedural rules which apply to international arbitration usually provide greater flexibility than those applying to its domestic counterpart.

Judicial Support for International Arbitration 

The Chinese judiciary has been very supportive in creating an arbitration-friendly environment. China acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”) in 1986. So far, only a limited number of foreign awards have been rejected by courts on the grounds specified in the Convention. Courts have been reasonably cautious in examining arbitral awards when judicial review is needed. In addition, Chinese courts have provided judicial assistance to arbitral tribunals in terms of ordering preservation measures and enforcing awards. 

It is worth mentioning that since 1995, the SPC has established a reporting system for matters related to the setting aside of foreign related arbitral awards and non-enforcements of foreign-related or foreign awards. Under this reporting system, if the intermediate court intends to not enforce the award or to set it aside, it must submit the application to the high court for exanimation before a decision is made. If the high court concurs, it – the high court – shall report this opinion to the SPC for a final decision. At the end of 2017, the SPC issued a judicial interpretation which extended the reporting system to domestic arbitration cases, therefore unifying the standards of judicial review and ensuring the finality of arbitral awards. 

Other efforts have also been made to encourage arbitration, including allowing international arbitration institutions such as HKIAC, ICC, and SIAC to open offices in Shanghai. The SPC’s Opinion titled “companies registered in FTZs agree to arbitration in certain locations in China, with certain arbitration rules and by certain persons may be recognized as valid” also slightly opened the door to ad hoc arbitration in China.

Understanding Different Institutional Rules 

Arbitration rules vary from institution to institution. Understanding these rules is vital for the effective conduction of arbitration proceedings.  

Established in 1995 as an independent and non-governmental institution, the BAC/BIAC’s development can be seen as an epitome of the evolvement of Chinese arbitration industry. From seven cases filed in 1995 to 3550 cases filed in 2017, BAC/BIAC has experienced a rapid increase in its caseload along with a dramatic improvement in the quality of its service. The BAC/BIAC Arbitration Rules (the “BAC Rules”) were formulated in 1995 and have subsequently been revised eight times to comply with international standards. The current BAC Rules (which came into force in April 2015) ensure party autonomy to the maximum degree and adopt some of the most recent international practices such as emergency arbitrator and interim measures. Joinder of additional parties and the consolidation of parallel proceedings into a single arbitration are also feasible under the BAC Rules. 

In recent years, there has been a large increase of foreign parties utilizing the services of the BAC/BIAC. Since 2013, the BAC/BIAC has   accepted approximately 50 international cases each year with parties coming from more than 30 countries. The steady increase demonstrates that Beijing is becoming an emerging international arbitration center. 

Conclusion

Although China is basically a new player in the field of international arbitration, the efforts made by a growing number of arbitration commissions together with the support of Chinese judicial bodies have created an arbitration-friendly environment for both domestic and foreign parties. The author believes that with international competition, Chinese arbitration institutions will further perfect their rules and services to better meet the expectations of international users

By Chen Fuyong, Deputy Secretary General, and Zhang Xi, Case Manager, Beijing Arbitration Commission/Beijing International Arbitration Center

This Article was originally published in Issue 5.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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