Arbitration in the PRC

The 1995 Arbitration Law 1995 and Arbitration Agreements/Clauses

The PRC Arbitration Law (中华人民共和国仲裁法)(the Arbitration Law) governs arbitration in China.

Validity of an Arbitration Agreement / Clause under Chinese Law

Article 16 of the Arbitration Law provides that an arbitration clause must contain the following:

(i) an expression of intention to apply for arbitration;

(ii) the matters for arbitrations; and

(iii) a designated arbitration commission.

Article 18 of the Arbitration Law provides: "If an arbitration agreement contains no or unclear provisions concerning the matters for arbitration or selection of the arbitration commission, the parties may reach a supplementary agreement. If no such supplementary agreement can be reached, the arbitration agreement shall be void."

Once a dispute has arisen, it may be difficult for the parties to make any supplemental agreement. Thus, in order that the parties' intention to submit any disputes to arbitration is not frustrated, it is important for the parties to ensure that the arbitration clause in their contract complies with Article 16 of the Arbitration Law from the outset, and in particular the selection of the arbitral commission.

Under Article 16 of the Arbitration Law (and Article 3 of the CIETAC arbitration rules), an arbitration agreement must also be in writing. Exchanges of letters, telexes, telegrams, and / or documents exchanged electronically should constitute a "written agreement".¹

Effect of Arbitration Agreement

A valid arbitration agreement concluded between two parties should prevent one party from commencing court proceedings under Chinese law.

Article 5 of the Arbitration Law provides that if the parties have concluded an arbitration agreement and one party institutes proceedings in a people's court, the people's court shall not accept the case unless the arbitration agreement is void.

In addition, Article 26 of the Arbitration Law provides that if there is an arbitration agreement, but one party commences litigation in a People's Court, the People's Court will dismiss the case where the other party challenges the jurisdiction of the court by submitting the arbitration agreement before the first hearing.²

In general, therefore, the existence of an arbitration agreement should prevent the parties to the contract from circumventing that agreement and instituting proceedings in the courts. However, Article 26 of the Arbitration Law provides a caveat to this by stipulating that where a plaintiff has commenced proceedings in the people's court (in circumstances where the parties have concluded an arbitration agreement) and the defendant does not raise an objection to the people's court prior to the first hearing, the defendant shall be deemed to have renounced the arbitration agreement and the people's court shall continue to try the case.

Further, Article 148 of the Application of the

Several Questions Opinion³ provides that if a party commences proceedings before the court and: does not declare the existence of an arbitration agreement; and the other party submits a defence; then the court shall be deemed to have jurisdiction over the case.

Thus, in circumstances where an arbitration agreement does exist and where the plaintiff has commenced court proceedings, the defendant should be careful not to submit a defence to the court, but instead should challenge the jurisdiction of the court on the basis of the arbitration agreement. In such circumstances, the court should dismiss the case and refer the parties to arbitration pursuant to the arbitration agreement.

Ad hoc Arbitration

The Arbitration Law does not contain any reference to, or provision for, ad hoc arbitration. Therefore, although not expressly forbidden by the Arbitration Law, no clear legal basis exists for ad hoc arbitration in China and as a result arbitration in China essentially is institutional, i.e., administered by an arbitral commission such as CIETAC.

Further, as we have said, under Article 18 of the Arbitration Law, if an arbitration agreement does not specify an arbitration commission, the arbitration agreement will be void under Chinese law.

This position has been further clarified by the case of People's Insurance Company of China, Guangzhou Branch v. Guangdong Guanghe Power Co. Ltd⁴ in which the Supreme People's Court held that ad hoc arbitrations are not permitted in mainland China. Thus, it seems clear that at present arbitrations conducted in China, whether or not governed by Chinese law, should be institutional.

The Supreme People's Court also issued draft Provisions Regarding the Handling by the People's Courts of Cases Involving Foreign-related Arbitrations and Foreign Arbitrations on December 31 2003 (SPC Draft Provisions). Although outside the scope of this article, the SPC Draft Provisions appear to place further restriction on ad hoc arbitration⁵ and it remains to be seen how the issue of ad hoc arbitration, common in international jurisdictions, will be resolved in China in the future.

Chinese Arbitration Institutes/Commissions

The main Chinese arbitration commission that deals with foreign-related arbitration is CIETAC (unless the dispute is of a maritime nature, in which case the dispute will most likely be dealt with by CMAC⁶). China also has various domestic arbitration commissions. Because of changes to the jurisdictional scope of these domestic arbitration commissions in 1996, and subsequent changes to CIETAC's jurisdictional scope in 1998 and 2000, the distinction between foreign-related arbitrations and domestic arbitration has become blurred. Domestic commissions can now hear foreign-related cases, and CIETAC also can now hear most domestic disputes.

In spite of this, CIETAC (and CMAC) remain the principal commissions of choice for hearing foreign-related arbitrations, not least because domestic arbitration commissions tend not to have a sufficiently wide panel of arbitrators from which an appointment can be made.

Choice of Arbitration Venue?

Under Article 128 of the PRC Contract Law (the Contract Law), parties to a contract with a "foreign element" can opt for arbitration before a Chinese arbitral institution or at a foreign arbitral institution.⁷ Conversely, parties to a contract without a "foreign element" will have no choice but to choose arbitration at a Chinese arbitral institution.

Despite the choice open to parties to contracts with a foreign element, many foreign companies still find themselves with CIETAC (or another Chinese arbitral commission) as the seat of the arbitration where the other party to the contract is a Chinese entity. Although such choice is often a matter of negotiation, some of the reasons for CIETAC having been selected include the fact that Chinese parties generally prefer arbitration in China to arbitration outside China; this is probably because they are more comfortable with having arbitration in their own jurisdiction. Further, many standard Chinese contracts generally provide for arbitration in China, and foreign parties in the main do not accord sufficient importance to dispute resolution clauses to insist otherwise.

Under the previously existing CIETAC Rules, parties are not permitted to choose a venue for CIETAC arbitration outside China (and it is not entirely clear for these purposes whether Hong Kong is deemed to be part of China). However, the New Rules appear to allow parties to choose CIETAC arbitration, but with the venue outside China, for example in London, Singapore or elsewhere. If implemented, this will revolutionize the concept of CIETAC arbitration, thus allowing CIETAC to administer arbitrations anywhere in the world.

Orthodoxy dictates that the place of the signing of the award (which is usually, but not always, the venue of the arbitration hearing), establishes the origin of that award. As the New Rules specifically provide that the award is deemed to be issued from the arbitration seat - which might differ from the place where the award is signed - this could give rise to potential conflict with other common law jurisdictions. It could also give rise to the question of how a CIETAC-administered award -heard outside of China will be treated by the Chinese courts. Will a hearing in London, for example, be heard as a London award enforceable under the New York Convention, or as a foreign-related / domestic CIETAC award?

Choice and Appointment of Arbitrators

The previously existing CIETAC Rules stipulate that arbitrators in CIETAC administered proceedings must be appointed from CIETAC's own panel of arbitrators that comprises both Chinese and "foreign" arbitrators (with Chinese arbitrators outnumbering "foreign" arbitrators). Parties to the arbitration, therefore, do not have full freedom of choice of arbitrator.

The New Rules, however, allow the parties to agree that qualified arbitrators can be selected from outside CIETAC's panel if CIETAC endorses the appointment. This opens up the scope of choice, as CIETAC's panel currently consists predominantly of Chinese nationals.

Most CIETAC arbitrations will involve a panel of three arbitrators, with each party to the contract having a choice of one arbitrator and either a joint appointment being made in respect of the third arbitrator, or authorization being given to CIETAC to appoint the third arbitrator. Pursuant to Article 24 of the previously existing CIETAC Rules, the third arbitrator acts as presiding arbitrator.

In practice, parties are usually unable to agree on the presiding arbitrator, and under the previously existing CIETAC Rules, CIETAC makes the appointment from its panel. The New Rules, however, set out a procedure that involves the parties each giving a list of three names to CIETAC, which - if CIETAC agrees - need not be from CIETAC's panel. If one of the three names from one party matches a name from the other party, that person will be appointed as the presiding arbitrator. If two or more names match, CIETAC will decide the appointment from these matched names based on the circumstances of the case. If no names match, or the parties do not make an appointment, or fail to provide CIETAC with a list of three names, CIETAC will make the appointment from its panel (which may be result in an appointee other than any of the names provided by the parties).

In the interest of impartiality, it is generally advisable that a provision be inserted into the arbitration agreement providing that the nationality of the third arbitrator not be the same as the nationality of either of the parties to the contract. The reason for this is that a Chinese contractual party will invariably appoint a Chinese arbitrator and a Western contractual party will invariably appoint a non-Chinese arbitrator. If, as is usually the case, the parties are unable to agree on the appointment of the third arbitrator, such that CIETAC makes the appointment pursuant to the CIETAC Rules (and this is still the default mechanism under the New Rules), it is possible that CIETAC will appoint a Chinese national as the third and presiding arbitrator.⁸ Unfortunately - and this could be more in the way of perception than substantive merit - this could give rise to the impression of a 2:1 advantage in favour of the Chinese party, particularly if the latter is believed to wield local influence.

Such a perceived difficulty can be avoided by providing in the contract that the nationality of the third arbitrator cannot be the same nationality as either of the two parties to the contract. From experience, CIETAC has accepted and respected such a provision.

In addition, it has been observed that many foreign arbitrators may be reluctant to accept a CIETAC appointment because remuneration is much lower than in other international arbitrations; this is something that should be borne in mind before deciding on CIETAC arbitration as the venue for dispute resolution.

Rules and Procedure in CIETAC Proceedings

In the absence of agreement, the arbitration rules issued by CIETAC govern CIETAC proceedings. Amendments made by the parties to the previously existing CIETAC Rules must first receive CIETAC's approval.

However, the New Rules now provide that amendments (for example, located in the arbitration agreement) should be respected and allowed, so long as such amendments can be implemented and also do not violate mandatory provisions of the law of the seat of the arbitration. The removal of the requirement that CIETAC's approval be obtained provides greater autonomy to the parties to decide how they want the arbitration to be conducted, and is in line with international practice on the conduct of arbitration proceedings.

The New Rules also make clear that the parties can select other arbitral rules to govern their arbitration, for example the UNCITRAL Rules. This appears to reflect CIETAC's evolving willingness to administer arbitrations under rules other than its own.

The New Rules also provide that unless the parties agree otherwise, CIETAC arbitration hearings need no longer follow the procedure of Chinese court hearings. The arbitrators can conduct either inquisitorial or adversarial proceedings, and can also cross-examine witnesses, convene pre-hearing conferences and issue directions. This proposed change addresses one of the most frequent criticisms of CIETAC arbitrations today.

The arbitral tribunal is also given power under the New Rules to create deadlines for the submission of evidence. The tribunal can refuse to accept evidence submitted after the deadline (although it can be extended with the tribunal's approval). A shorter time period has also been stipulated for concluding an arbitration matter: for foreign-related arbitrations the time for issuing an award has been shortened from nine months to six (from the establishment of the tribunal); for domestic arbitrations from six months to four.

Conclusion

As foreign investors continue to bet heavily on the continued growth in the Chinese economy, and as more Chinese parties venture beyond China, the likelihood of disputes arising between foreign and Chinese parties can only see an upward trend.

For parties who have to resolve their disputes in China, arbitration is one means of arriving at a fair resolution. CIETAC, in amending and promulgating new rules, seems prepared to answer these new challenges.

Endnotes

1 Article 11 of the Contract Law. This is reflected in Article 5 of the New Rules.

2 Unless the arbitration agreement is void. See also Article 257 of the Civil Procedure Law, adopted on April 9 1991.

3 Issued on July 14 1992.

4 (2003) Min Si Zhong Zi No. 29.

5 Article 27 of the SPC Draft Provisions provides: "An arbitration agreement between the parties that provides for ad hoc arbitration shall be invalid, except where the relevant parties are all nationals of countries that are members of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 and the laws of such countries do not prohibit ad hoc arbitration." Because the Supreme People's Court has held that ad hoc arbitrations are not permitted in China and because there is no provision for ad hoc arbitration in the Arbitration Law, Article 27 appears to be directed at ad hoc arbitrations outside China. However, by the same token, because Chinese law does not allow ad hoc arbitration, in any circumstances where one party is seeking to enforce an ad hoc arbitration award against a Chinese party via the Chinese courts, the arbitration agreement would be invalid under the second limb of Article 27 and the Chinese courts may refuse to enforce such awards even where the agreement is valid under its governing law.

6 China Maritime Arbitration Commission.

7 Under Article 126 of the Contract Law, parties to a contract with a "foreign element" may also choose the governing law of the contract unless Chinese law provides otherwise: exceptions include Sino-foreign joint venture contracts and natural resources contracts. Article 178 of the Supreme People's Court, Several Questions regarding the Implementation of the Chinese Civil Code Opinion (adopted on January 26 1988) provides that a contract will have a foreign element when: (a) one or both parties to the contract are foreign or stateless parties; (b) the subject matter of the contract is located in a foreign country; or (c) the act which gives rise to, modifies or extinguishes, the rights and obligations under the contract occurs in a foreign country.

8 The reason for this is arguably that there are many more Chinese arbitrators on CIETAC's panel than non-Chinese arbitrators. Notably, and perhaps responding to criticism, CIETAC has in some recent cases appointed a non-Chinese national to be the third arbitrator although the prevalence of this practice is uncertain.