Reconsidering arbitration in China

International parties concluding commercial contracts in China have always had to pay careful attention to their dispute resolution clauses. China-seated arbitration proceedings can be seen as a distinctive and sometimes restrictive process, filled with traps for the unwary. For this reason, foreign parties unfamiliar with Chinese dispute resolution procedures often attempt to ensure that any potential disputes are referred to arbitration institutions located outside the mainland.

Following several changes in PRC legislation affecting arbitration as well as the rules of various Chinese arbitral institutions, some international parties will begin to rethink this position. Many others, however, will continue to negotiate hard for arbitration clauses specifying an offshore seat and, where this is impossible, will insist that these clauses contain various protections intended to render onshore arbitration consistent with arbitral procedures normally found outside mainland China.

Legislative and institutional changes

China's arbitration framework was in large part established by the PRC Arbitration Law (中华人民共和国仲裁法) and the PRC Civil Procedure Law (中华人民共和国民事诉讼法) (CPL). The CPL was revised towards the end of 2012, incorporating changes that came into force on January 1 2013. The changes increase the certainty of the arbitration process and expand assistance the courts can offer to support arbitral proceedings.

The PRC's leading arbitration institutions have also looked to update their offerings, with CIETAC issuing new rules in 2012 and the Beijing Arbitration Commission (BAC) aiming to do the same in early 2013. CIETAC recently established a new sub-commission in Hong Kong, its first outside the mainland. However, this positive announcement was to some extent overshadowed by the controversy surrounding the suspension by the Beijing-based CIETAC of authorisation to its Shanghai and South China sub-commissions. This dispute is a source of uncertainty for parties whose arbitration clauses specify CIETAC arbitration in one of those locations.

Arbitration options: CIETAC and other institutions

Under Chinese law, a valid agreement for arbitration in China must provide that the arbitration is administered by a recognised mainland arbitration commission. Party choice is therefore limited to China's recognised arbitration institutions, the best known of which, when it comes to administering high-value or international cases, are CIETAC and the BAC.

CIETAC's new 2012 Rules, effective May 1 2012, introduce various revisions bringing CIETAC arbitration further in line with international best practice. The rules provide for a more flexible approach when it comes to agreeing the seat of arbitration (Article 7) and the language of the arbitration (Article 71). Where otherwise permissible under Chinese law, the parties may agree to CIETAC arbitration in Hong Kong or elsewhere outside of China. The amended rules also make explicit CIETAC's power to administer arbitrations conducted in accordance with the arbitration rules of other arbitral institutions (Article 4), even when located in China. The updated provisions also introduce a mechanism for the consensual consolidation of parallel proceedings (Article 17) and streamline the arbitral appointment system in cases of multiple claimants or defendants (Article 27).

CIETAC's new Rules, when applied in combination with a tribunal of internationally-minded and experienced arbitrators, offer the potential for a sophisticated means of resolving Sino-international disputes by CIETAC arbitration seated in China. However, even following these reforms, foreign parties will remain concerned by aspects of China's domestic arbitration procedure, as practised by purely domestic arbitrators with little experience of international procedures.

Domestic arbitration traditions do not always provide for document production, or allow for comprehensive examination or cross examination of witnesses. In practice, Chinese tribunals often take an inquisitorial approach to arbitration, leading the investigation of the facts themselves. This can be contrasted with the adversarial approach most commonly adopted outside China, where the parties lead the presentation of evidence. Similarly, the mixing of arbitration with conciliation or mediation, while widespread in domestic arbitration, is not always a popular approach outside the mainland.

As a result, international parties will sometimes seek to incorporate provisions into their arbitration clauses which allow for an arbitral procedure which is more similar to what they would expect in international arbitration proceedings. For example, it is often recommended that parties incorporate the International Bar Association Rules on Evidence in International Arbitration Proceedings into their arbitration clauses, providing guidelines to the arbitral tribunal (see figure 1). Chinese parties too may consider such procedures to be beneficial, not least if, by agreeing to them, they ensure that the arbitration has a seat in mainland China.

Figure 1: Recommended arbitration clause for international parties choosing CIETAC

1.1. Any dispute arising from or in connection with this Contract shall be submitted to the China International Economic and Trade Arbitration Commission (the “CIETAC”) for arbitration which shall be conducted in accordance with the Commission's arbitration rules in effect at the time of applying for arbitration. The seat of the arbitration shall be [place].

1.2. The number of arbitrators shall be [one/three].

1.3. The [sole arbitrator/the presiding arbitrator] shall be of a nationality other than those of the Parties' [or the Parties' parent companies'] nationality or place of incorporation or registration.