This article is written by Anmol Garg pursuing Diploma in International Business Law from LawSikho.
With the rise of China’s economy to a global economy, the country has faced immense development and growth in various departments including arbitration. There are two main reasons for the same: first, the rise of China’s economy, and second, the implementation of the arbitration law of People of Republic China which was passed in 1994. As China’s economy developed, it started entering more and more commercial transactions, and eventually, some led to disputes. China has had a long history of mediation and conciliation but with the increase of transactions being entered into between Chinese and non-Chinese parties, arbitration also started developing as parties across the world today recognize arbitration as a suitable method of dispute resolution. Arbitration today is a preferred method and plays an increasingly important role in both the Chinese economy and its legal system, to increase foreign cooperation and provide them with assurance and more confidence while entering into business with the Chinese businessmen.
Development of arbitration in China
After the end of the Cultural Revolution in the 1970s, the role of lawyers and the legal systems advanced profoundly in China. Lawyers had to become more in sync with the global laws as well and the legal system had to be more conclusive and inviting for the foreign investors. From 1971-1991, the number of international commercial transactions being entered into was on a rise due to its back door policy in the newly decentralized economy and the government’s approach of establishing a socialist-market economy. The government’s focus was on attracting foreign investment in order to expand its economy and thus they had to provide reforms that the foreign investors preferred or were being offered in other countries. The three main reasons for the development of arbitration in China are stated below.
Arbitration law of People of Republic China (CAL)
China has set up a number of commissions to date to regulate its trade and commerce and arbitration in both the domestic and the international aspects. However, the major development was due to the promulgation of the Arbitration Law of the People of Republic China in 1994 (often referred to as CAL) when China was trying to develop a market economy. CAL adopted its legislation, practices, and provisions from New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), Model Law on International Commercial Arbitration (UNCITRAL Model Law), and United Nations Commission on International Trade Law (UNCITRAL). This law laid down the basics for arbitration like both the parties need to agree to refer the dispute to arbitration, the arbitration committee is free from the government, the parties are free to settle the dispute by conciliation and mediation before the arbitral award is announced, etc.
Judicial interpretations and circulars
The Supreme People’s Court (SPC) plays a dual role of being the highest judiciary seat and having the rulemaking power through the publications of judicial interpretations. These interpretations by the SPC are in the form of notices, replies, and directives that are issued by it to the lower courts in order to help them with the specific arbitration cases. Judicial interpretations are the tool that bridges the gaps in CAL. Specifically, in 2017, 2018, and 2019, SPC issued circulars that helped China develop and strengthen its arbitration practices.
Major changes in 2019
2019 has been a pro-arbitration year for China. The Chinese central government and the local Shanghai government have allowed the foreign arbitration institutions to set up their branch offices in the China (Shanghai) Pilot Free Trade Zone. This was the first time that China allowed foreign institutions to set up their operational branches in China to settle the disputes arising in China relating to international civil, commercial, investment, and maritime disputes. Also, in April 2019, mainland China and the justice department of Hong Kong signed an agreement that allowed the parties to a dispute in mainland china to apply for interim reliefs which was earlier not recognised.
Development of domestic commercial arbitration
To facilitate the growing need for international commercial arbitration, even the domestic commercial arbitration institutes have changed their arbitration rules. After the promulgation of CAL in 1994, the domestic institutions have been recognized after being reorganized as independent bodies. These arbitration bodies form arbitration committees and the disputes in which both the parties are from China are referred to them for their resolution.
Arbitration regulations in China
CAL is the governing modern law for arbitration in China. Following are the important points that need to be noted in relation to arbitration in China:
- In the international arbitration scenario, usually, both ad hoc and institutional arbitration are recognized. In ad hoc arbitration, the arbitrators or the arbitration panel are decided by the parties whereas in institutional arbitration the panel is provided by the institution. Ad hoc arbitration in China is prohibited. It is a common practice to regard ad hoc arbitration as invalid and therefore China only recognizes institutional arbitration.
- The fully domestic disputes are prohibited from submitting such a dispute for arbitration outside China. Chinese are of the view that if there is no ‘foreign element’ in the dispute, then it shall not be referred for arbitration outside China. However, if any of the enterprises are registered in Pilot Free Trade Zone and both the enterprises agree to submit the dispute outside, then they refer it to any institution outside China.
The arbitration law prohibits the following types of disputes to be referred for arbitration:
- Disputes concerning marriage, adoption, custody, fostering, and succession.
- Administrative disputes.
Thus, apart from the above, all forms of disputes can be referred for arbitration, however, there is an ongoing debate about whether administrative agreements with the government and Public Private Partnerships (PPP) can be referred for arbitration or not.
CAL requires that the parties shall have a valid agreement which shall be in writing and the arbitration agreement must:
- Express the parties’ intention to arbitrate,
- Set out the exact subject matters,
- Select an arbitration commission,
- Be in writing and validly executed,
- The subject matter submitted to arbitration must be arbitrable.
However, it is important that the parties shall reach an agreement about the arbitration agreement, or else the agreement shall be considered void. The arbitral tribunal is usually provided by the arbitral commission which usually consists of 3 arbitrators. The arbitrator must be from the legal profession and a foreign national can also be appointed as an arbitrator in foreign-related arbitrations.
The basic limitation period which applies for litigation cases also applies to arbitral disputes. The basic limitation period in China is three years in most cases unless it is specified by law.
As per Article 54 of the Arbitration Law, the arbitral award must be in writing stating the claims, rebuttal, and the reasons for deciding the award. The 2015 CIETAC Rules states that the tribunal shall render an award in 6 months, in summary, procedures the award shall be rendered within 3 months, and in purely domestic disputes the award shall be rendered within 4 months.
Procedure of arbitration
The procedure for arbitration has been laid down in Articles 22 and 23 of the Arbitration Law. In order to commence the arbitration proceedings, the party shall:
- Submit an arbitration application in writing to the arbitral institution along with the arbitration agreement with the required documents. As per the 2015 CIETAC Rules, the arbitration proceedings shall commence from the day they receive the application
- After this, the arbitral commission decides whether to accept the application or not depending on various aspects like whether it is within the jurisdiction, is there a valid agreement in support, and have the parties decided upon the number of arbitrators for the panel
- If the application gets accepted, then a copy of the application and the applicable rules is delivered to both the claimant and the respondent along with the details and number of arbitrators.
- The arbitration proceedings are usually done orally but if both the parties agree, then an award can also be rendered on the basis of written submissions made by the parties.
Arbitration institutions seated in China
Following are the most commonly used arbitration institutions seated in China;
- China International Economic and Trade Arbitration Commission (CIETAC).
- Shanghai International Economic and Trade Arbitration Commission/Shanghai International Arbitration Center (SHIAC).
- South China International Economic and Trade Arbitration Commission/Shenzhen Court of International Arbitration (SCIA).
- Beijing Arbitration Commission/Beijing International Arbitration Center (BIAC).
- China Maritime Arbitration Commission (CMAC).
- Shanghai Arbitration Commission (SHAC).
- Guangzhou Arbitration Commission.
Popularity and efficacy
The statistics that are released by the law office of the Republic of China are quite reassuring as to the effectiveness and popularity of the arbitral institutions of China. As per the statistics, till 2020 a total of 255 commissions had been formed in the main cities of the country. More than 500,000 cases have been undertaken by these commissions for institutional dispute resolution costing over USD 110 billion. The most famous and favored institutions are the China International Economic and Trade Arbitration Commission (CIETAC), Beijing Arbitration Commission (BAC), Beijing International Arbitration Centre (BIAC), and the Shanghai International Economic and Trade Arbitration Commission/Shanghai International Arbitration Center (SHIAC). In the trade war between China and the USA during the pandemic, 3,615 cases were accepted by CIETAC alone which was 8% higher than the preceding year. The general caseload for other institutions like BAC and BIAC have witnessed an annual growth of 35.95% and the parties involved range from countries like Macau, Africa, and Taiwan to Canada, UK, America, etc.
There were no special national courts for international arbitration in China and all this was done by the usual courts in the country itself until it set up the China International Commercial Court (CICC) in 2018 to adjudicate the matters of international dispute. CICC performs multiple functions including hearing cases for setting aside and enforcement of the awards. China is a signatory to many treaties and conventions like the New York Convention 1958, ICSID Convention, Hong Kong SAR, and Macau SAR 2000 and has entered into various Bilateral Investment treaties and treaties with investment provisions which prompted the need for the establishment of the international court.
The efficiency in the arbitral awards rendered by the Chinese Institutions is apparent from the fact that till now no awards that have been rendered by BAC and BIAC have been set aside or non- enforced. Further, these institutions have managed to maintain an average of 157days in discarding the ordinary international commercial disputes for which the maximum number of days available to them are 6 months and 67 days for other international disputes for which a maximum of 90 days are available to them to finish the proceedings. Today, countries also prefer to settle their disputes in China. The only drawback is that China has not yet adopted the UNCITRAL Model Law because of which it only recognized ad hoc arbitration and some may not agree to it.
The continuous improvement in China’s economy and the business environment has further ‘opened up’ gates for foreign investment in China and has empowered and to some extent led to major changes in the arbitration laws of the country. China initially was dependent on a very traditional system of arbitration and to some extent it still follows the same values like only recognizing ad hoc arbitration, not allowing domestic arbitration to opt for foreign institutional arbitration but being a signatory to a number of treaties and conventions has widened its scope and it now allows for arbitration as a method for dispute resolution in international commercial transactions. Even if the arbitration is still ad hoc in China, the arbitration panel in the international commercial disputes includes a number of arbitrators as non-Chinese and does not restrict the panel to be fully Chinese.
The arbitration law or CAL applies uniformly in both the domestic and international arbitration with some differences like if a domestic dispute is referred to the People’s court for setting aside of the award, then the court may examine the issues involved in the arbitral award however, in international cases, the court usually refrains from disturbing or touching the issues behind the arbitral award.
The recent changes like the establishment of China (Shanghai) Pilot Free Trade Zone, signing of the agreement for mainland China with Hong Kong for interim reliefs, and the establishment of a new dispute resolution organisation named International Commercial Dispute Prevention and Resolution Organization (ICDRRO) by the China Chamber of International Commerce (CCOIC) for dispute resolutions between 45 countries by various methods including arbitration have been welcoming. The legal framework of the country has changed drastically due to its increasing popularity because of the efficiency of these institutions; however, changes are further required specifically in the CIETAC Act and related acts like CAL, Civil Procedure, etc. to deal with the ever-increasing workload of cases.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: