Reconsidering arbitration in China

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.

1.4. The Parties may appoint arbitrators who are not on the Panel of Arbitrators provided by the CIETAC and the arbitrators' remuneration may be set without reference to any schedule of fees normally adopted by the CIETAC.

1.5. The language of the arbitration shall be [English / such language as the Chairman of the CIETAC considers appropriate to the circumstances of the case].

1.6. The tribunal may take into account the International Bar Association's Rules on the Taking of Evidence in International Arbitration then in effect in deciding any application by the Parties requesting the production of documents.

1.7. In making its award, the tribunal shall not decide matters ex aequo et bono.

1.8. The tribunal shall adopt an adversarial procedure for the arbitration.

1.9. The arbitration award shall be final and binding upon both Parties.

One area of particular importance is the composition of the arbitral tribunal. At present, absent party agreement to the contrary, any CIETAC-appointed arbitrator will be nominated from the CIETAC list of arbitrators and paid according to the fee schedule for CIETAC arbitrators, which remains low by international standards. Parties that wish to ensure their case comes before arbitrators with an international outlook and experience need to ensure that their arbitration clause specifies a right to appoint outside of the CIETAC panel and pay scales.

Interim relief

The Chinese arbitral regime provides PRC courts with more judicial oversight than in most other jurisdictions that are considered arbitration friendly. Chinese law does not empower arbitral tribunals to order interim measures of their own volition, as they may in some other jurisdictions. Instead, the parties must submit these applications to the relevant courts. In the case of arbitral proceedings, these measures are to be conservatory only. (That is, relating to the preservation of property or protection of evidence.) They do not include, for instance, the ability to compel a witness to attend a hearing (Article 28 Arbitration Law).

It is significant, therefore, that CIETAC's new rules, which contemplate circumstances in which CIETAC tribunals sit outside mainland China, transcend the existing law. While the rules retain older provisions requiring CIETAC to forward any application for conservatory measures to the competent Chinese court, they also include provisions empowering the tribunal to order any interim measures it deems necessary or proper “in accordance with the applicable law” (Article 21).

It is notable too that the recent changes to the CPL, while they do not overturn the prohibition against tribunal-ordered interim measures, do introduce reforms aimed at making life simpler for parties seeking interim relief. In particular, the new provisions allow for a more flexible system when it comes to the protection of assets before arbitral proceedings begin. In the past, parties to a potential arbitration were required to wait until the arbitration proceedings had begun before they could apply to the arbitration commission in question, which, once it had accepted the case, would in turn pass the application to the relevant court. Now, under the CPL's new Articles 81 and 101, a party may short-circuit this process by applying directly to the Chinese courts even before the arbitration proceedings have begun.

Jurisdiction, challenge and enforcement

Another aspect of the Chinese courts' wide supervisory powers over domestic arbitration is the fact that arbitral tribunals in China are not uniformly empowered to rule on their own jurisdiction. Parties to domestic proceedings may apply to the courts to challenge an arbitration clause any time after arbitral proceedings begin and before the arbitration tribunal's first hearing (Article 20, Arbitration Law). Arbitral proceedings will be stayed pending such an application.

Of practical importance, once an award has been issued, the scope for setting aside domestic awards has been reduced under the new provisions of the CPL. The former basis on which a domestic award might be overturned included the grounds that the tribunal had made, in the course of the arbitration, errors of fact or law (Article 213). These provisions raised a real danger that such an application would effectively lead to a re-hearing of the merits. Under the revised CPL, the grounds for setting aside a domestic award are limited to such grounds as fraud or the withholding of evidence by a party to the arbitration.

Currently, the enforcement regime in China for domestic awards (those rendered by tribunals in mainland China) is considered less robust than that for foreign awards, including awards made in the state of another party to the 1958 New York Convention. The enforcement of foreign awards in China is subject to a reporting regime, whereby the lower People's Courts cannot refuse to enforce a foreign award without referring that decision to the higher courts and ultimately to the Supreme People's Court in Beijing. The recent revisions to the CPL to a limited extent redress this imbalance.

Confidentiality

The confidentiality of arbitral proceedings is, in general terms, a much touted advantage of international arbitration as a means of dispute resolution. However the strength of confidentiality provisions can vary from jurisdiction to jurisdiction.

The PRC Arbitration Law specifies at Article 40 that, unless the parties agree otherwise, arbitration hearings shall be conducted in private. The rules of the various arbitration centres, such as Article 36 of CIETAC's 2012 Rules, also provide for a closed hearing.

However, significantly for parties in proceedings where technical proprietary information is to be considered, the Law is silent on the issue of confidentiality of information divulged in arbitral proceedings.

Common errors by foreign investors

When it comes to China-seated arbitration, foreign parties are most often disadvantaged by a failure, when drafting their arbitration clauses, to understand the restrictions of Chinese law, or the distinctive approach of mainland Chinese arbitrators. In some cases the use of certain words in drafting the arbitration clause can lead to a challenge in the courts and to the clause being declared invalid. This may occur in circumstances where an arbitration clause that is governed by or to be construed in accordance with Chinese law specifies a China-seated arbitration which is either ad hoc or else is administered by a foreign arbitral institution that is not a recognised Chinese arbitration commission. As described above, such an arbitration clause will be considered invalid under Chinese law.

CIETAC's new Rules and the various other legislative and institutional improvements in China's arbitration regime are to be welcomed. They are a further move towards creating the possibility of a more cost-effective dispute resolution mechanism acceptable to international and Chinese parties alike. Nevertheless, foresight and substantial precautions are required in order to achieve that outcome.

David Howell, James Rogers, and Matthew Townsend, Fulbright & Jaworksi, London, Hong Kong and Beijing