Foreign arbitration institutions may, theoretically, be relevant for the Chinese arbitration market in two ways. First, they might conduct arbitrations in mainland China by establishing operating offices there. Second, without business offices in place, they may still be involved by administering cases seated in mainland China.
Foreign arbitration institutions may, theoretically, be relevant for the Chinese arbitration market in two ways. First, they might conduct arbitrations in mainland China by establishing operating offices there. Second, without business offices in place, they may still be involved by administering cases seated in mainland China. In reality, there have been legal obstacles and uncertainties for foreign arbitration institutions to provide arbitration services in China.[1] Recent years have witnessed a series of developments that represent a significant step towards the removal of the barriers for foreign arbitration institutions to enter the Chinese arbitration market.
First, both Shanghai and Beijing have allowed reputable foreign arbitration and dispute resolution institutions to set up operations in the designated area.
To implement the relevant polices set out in the Framework Plan for the China (Shanghai) Pilot Free Trade Zone Lin-Gang Special Area issued by the State Council on 27 July 2019[2] and the Measures for the Administration of the Lin-Gang Special Area of China (Shanghai) Pilot Free Trade Zone passed by the People's Government of Shanghai Municipality on July 30 2019[3], the Shanghai Municipal Bureau of Justice released the Measures for the Administration of Overseas Arbitration Institutions' Establishment of Business Departments in the China (Shanghai) Pilot Free Trade Zone Lin-Gang Special Area on 21 October 2019.[4]
Under the Measures for the Administration, from 1 January 2020, non-profit arbitration institutions legally established in foreign countries and in Hongkong, Macao and Taiwan, as well as arbitrations institutions established by international organizations joined by China may apply for the registration of establishing a business division in the New Lin-Gang Area. To be eligible to apply, the arbitration institutions must also meet the following requirements: (i) it has been lawfully incorporated overseas and in existence for more than five years; (ii) it has conducted substantial arbitration activities overseas, and acclaimed high international reputation[5]; (iii) The person who would be in charge of the business division has not been subjected to a criminal penalty for any willful offense. Accordingly, the several well-known international arbitration institutions, including the Court of Arbitration of the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), Stockholm Chamber of Commerce Arbitration Court (SCC), the Singapore International Arbitration Centre (SIAC), and the Hong Kong International Arbitration Centre (HKIAC) are all covered by the Measures for the Administration.[6] Eligible overseas arbitration institutions may submit their applications to the Shanghai Municipal Bureau of Justice who would examine the materials and decide whether to approve the registration within two months from the date of acceptance.
The business division may conduct foreign-related arbitration business concerning civil and commercial disputes arising in international commerce, maritime, investment and other fields. More specifically, it may provide arbitral services including (i) acceptance, trial, hearing and awarding of cases; (ii) case management and services; and (iii) business consultation, guidance, training and discussion. It should be noted that the business division is not allowed to engage in the arbitration of cases with no foreign elements or further establish any branch or representative office.
With regard to what constitutes “foreign-related” arbitration, according to Article 1 of the Interpretations of the Supreme People's Court on Several Issues Concerning Application of the Law of the People's Republic of China on Choice of Law for Foreign-Related Civil Relationships (I), a civil relationship can be considered “foreign-related” when it falls under any of the following circumstances: (i) where either party or both parties are foreign citizens, foreign legal persons or other organizations or stateless persons; (ii) where the habitual residence of either party or both parties is located outside the territory of the People's Republic of China; (iii) where the subject matter is outside the territory of the People's Republic of China; (iv) where the legal fact that leads to establishment, change or termination of civil relationship happens outside the territory of the People's Republic of China; or (v) other circumstances under which the civil relationship may be determined as foreign-related civil relationship. In practice, one form of “other circumstances” is where both parties are wholly foreign-owned enterprises registered in Free Trade Zones (FTZ). Under this circumstance, courts have considered the civil relationship as “foreign-related.”[7] Therefore, it is likely that the business division can also hear cases where both parties are wholly foreign-owned enterprises registered in FTZ.
On 13 December 2019, the Supreme People's Court issued Opinions of the Supreme People's Court on Provision Regarding the Judicial Services and Guarantees Provided by the People's Courts for the Construction of China (Shanghai) Pilot Free Trade Zone Lin-Gang Special Area, Article 6 of which further clarifies the judicial support for overseas arbitration institutions establishing an operating office in Lin-Gang Special Area. This Article provides that “The reform of and innovation on the arbitration system in Lin-Gang Area shall be supported and overseas arbitration institutions registered shall be supported in arbitrating civil and commercial disputes in international commercial affairs, maritime affairs, investment, and other fields in Lin-Gang Area. The application for and enforcement of property preservation, evidence preservation, conduct preservation and other interim measures before and during arbitration process shall be supported and guaranteed in accordance with the law, judicial examination shall be conducted for arbitral awards according to the law, and Shanghai shall be supported in turning into an Asia-Pacific arbitration center.”
From this provision it is understood that the cases administered by the business divisions in Lin-Gang Special Area would be viewed as domestic arbitrations. More specifically, since these business divisions are only allowed to handle disputes with foreign elements, procedures applicable to “foreign-related arbitration” laid down in relevant laws (e.g. The Civil Procedure Law of the People's Republic of China, Arbitration Law of the People's Republic of China) are likely to be applied to the arbitrations administered by them. As such, a party applied for a preservation measure may need to submit his or her application through the business division of the overseas arbitration institutions to the intermediate people’s court at the place of domicile of the respondent, or at the place where the respondent's property is located or at the place where the evidence is located.[8] In addition, with the status of foreign-related arbitration awards, according to Article 70 and 71 of Arbitration Law, the examination of the awards by the people’s court for the set aside or non-enforcement is limited to the defects in the validity of the arbitration agreement and major procedural issues in the arbitration.[9] Unlike the domestic arbitration awards without foreign elements, the substantive issues in the foreign-related arbitration awards will not be reviewed.[10]
On 28 August 2020, the State Council replied to and approved the Plan for Deepening the Comprehensive Pilot Program of a New Round of Expanding Opening-up of the Service Sector in Beijing Municipality and Building a National Comprehensive Demonstration Zone for Expanding Opening-up of the Service Sector. According to the Plan, similar to the policies introduced by Lin-Gang Special Area concerning arbitration, “well-known overseas arbitral and dispute resolution institutions shall be allowed to establish business divisions in specific areas of Beijing, as registered with the justice department of the People's Government of Beijing Municipality and filed with the justice department of the State Council, to provide arbitration services with respect to civil and commercial disputes arising in international commerce, investment and other fields, so as to legally support and guarantee Chinese and foreign parties’ application for and enforcement of interim measures such as property preservation, evidence preservation and conduct preservation before and during arbitration.” Further details for the implementation of the policy is not yet issued.
Second, latest court practices have also sent out positive signals for foreign arbitration institutions to administer cases seated in mainland China.
There have been controversies over the validity of arbitration agreements providing for foreign arbitration institutions administering arbitrations with a seat in mainland China. In recent years, the practice of the courts has consistently recognized the validity of such agreements, largely dispelling any doubts.
In 2013, in the Reply of the Supreme People's Court to the Request for Instructions on Application for Confirming the Validity of an Arbitration Agreement in the Case of Anhui Long Li De Packaging and Printing Co., Ltd. v. BP Agnati S. R. L., the Supreme People’s Court (SPC) upheld the validity of the arbitration agreement providing for ICC arbitration seated in Shanghai.[11] In this case, since the parties didn’t agree upon the laws governing the examination of the validity of the arbitration agreement, the SPC applied the laws at the place of arbitration, i.e. the laws of the PRC according to Article 16 of the Interpretation of the Supreme People's Court concerning Some Issues on Application of the Arbitration Law of the People's Republic of China.[12] According to Article 16 of the Arbitration Law, an arbitration agreement shall contain three elements, namely (i) the intention of requesting for arbitration; (ii) subject matter of arbitration; and (iii) the choice of the arbitration commission. The SPC decided that the arbitration agreement at issue had the intention of requesting for arbitration, stipulated the subject matter of arbitration and specified the choice of arbitration institution, and therefore shall be deemed valid.
In the same year, in the Reply of the Supreme People’s Court to the Request for Instructions on the Validity of an Arbitration Clause in the Case of the Sale and Purchase Contract Dispute Between Ningbo Beilun Licheng Lubricating Oil Co., Ltd. and Formal Venture Corp., the SPC held that the arbitration clause providing for ICC arbitration in Beijing should not be deemed invalid.[13]
On 29 June 2020, the Shanghai Intermediate People’s Court confirmed the validity of the arbitration agreement agreeing to SIAC arbitration seated in Shanghai in the case of Daesung Industrial Gases Co., Ltd v Praxair (China) Investment Co., Ltd.[14] With regard to the respondent’s view that there were no provisions in the Arbitration Law of the PRC allowing foreign arbitration institutions to administer cases seated in mainland China, the Court offered the following four reasons for its dismissal.[15]
First, as a form of alternative dispute resolution, the very essence of arbitration was about settling disputes voluntarily by the parties and, in this sense, did not relate to the issue of whether China had opened up its arbitration market to foreign arbitration institutions.
Second, the judicial interpretations issued by the SPC shall have full legal force. According to the Provisions of the Supreme People's Court on the Judicial Interpretation Work, the SPC’s “Reply” was one of the forms of judicial interpretations.[16] In SPC’s Reply to the case of Long Li De Packaging and Printing Co., Ltd. v. BP Agnati S. R. L., the SPC confirmed the validity of an arbitration agreement seeking for arbitrations administered by a foreign arbitration institution and seated in mainland China.
Third, there was nothing in Chinese law that explicitly prohibited foreign arbitration institutions from administering cases seated in mainland China. The respondent’s view that foreign arbitration institutions were not allowed to administer cases seated in mainland China was also contrary to the trends in the development of international commercial arbitration.
Fourth, legislation and judicial practice should complement one another. Although the Arbitration Law did not tackle the issue of whether foreign arbitration institutions could administer cases seated in mainland China due to the lack of an international perspectives back when it was formulated, the judicial interpretation of the SPC provided guidance on this issue. The respondent’s view fixated solely on the problems with the Arbitration Law, while ignoring the legal effects of judicial interpretations and the progress made by China’s judicial system in aligning with the trends in the development of international commercial arbitration.
On 6 August 2020, the Guangzhou Intermediate People’s Court ruled in Brentwood Industries (US) v Guangzhou Zhengqi Trading Co Ltd[17]that an arbitral award issued in an ICC arbitration seat in Guangzhou should be viewed as a foreign-related domestic arbitration award and enforced under the Civil Procedure Law of the PRC. The Court’s ruling reinforces the tendency that, in determining the nationality of an arbitration award, the “seat standard” is replacing the “institution standard” and becoming the norm.[18] In other words, the nationality of an arbitral award will be determined based on the seat of the arbitration rather than the locality of the arbitration institution, which highlights the trend of internationalization of the Chinese arbitration regime.[19]
From allowing well-known overseas arbitration institutions to establish business divisions in the designated area in Shanghai and Beijing to confirming the validity of arbitration agreements providing for foreign arbitration institutions to administer arbitration seated in mainland China and facilitating the enforcement of the arbitral awards rendered in such arbitrations, the recent practices show China’s willingness to open up its arbitration market to foreign players and improve the arbitration regime to align with internationally acceptable standards. The proposed amendment of the PRC Arbitration Law reinforces this trend in many aspects, for example, the new provisions regarding foreign arbitration institutions setting up operational entities in PRC and the formal adoption of the “seat standard” in determining the nationality of arbitral awards. With this pro-arbitration environment, it is anticipated that foreign arbitration institutions will be more involved in the Chinese arbitration market in the future.
[1] Martin Rogers and Noble Mak. Foreign Administered Arbitration in China: The Emergence of a Framework Plan for the Shanghai Pilot Free Trade Zone. Kluwer Arbitration Blog, 6 September 2019.
[2] No. 15 [2019] of the State Council, Part 2 Item 4, effective from 27 July 2019, http://www.gov.cn/zhengce/content/2019-08/06/content_5419154.htm
[3] Order of the Shanghai Municipal People’s Government [2019] No. 19, Article 13, effective from 20 August 2019, http://www.shanghai.gov.cn/nw2/nw2314/nw2319/nw2407/nw45024/u26aw61615.html
[4] No. 5 [2019] of the Shanghai Municipal Bureau of Justice, effective from 1 January 2020, http://www.shanghai.gov.cn/nw2/nw2314/nw2319/nw41149/u83aw7149.html
[5] The assessment of whether an arbitration institution has a high international reputation will be mainly based on a comprehensive inspection of the following elements: (i) the number, the value of subject matters, and the level of internationalization of arbitration cases handled by the arbitration institution; (ii) factors such as the ranking of arbitration institutions issued by authoritative magazines, newspapers, and evaluation agencies in the field of international arbitration, etc. Shanghai Municipal Bureau of Justice, Application Guidelines for Business Offices Established by Overseas Arbitration Institutions in Lin-Gang Special Area of China (Shanghai) Pilot Free Trade Zone.
[6] It is reported that HKIAC, SIAC and other well-known international arbitration institutions are discussing with the Lin-gang Special Area Administration about their intention to establishing a business division. See Sina Shanghai, Overseas arbitration institutions can set up business divisions in Lin-Gang Special Area, with a maximum reward of 1 million (境外仲裁机构可在临港新片区设立业务机构 落户最高奖励100万), 21 May 2020, http://sh.sina.com.cn/news/b/2020-05-21/detail-iirczymk2862501.shtml
[7] See No.4 of Second Group of Model Cases Involving Construction of the “Belt and Road” Published by the Supreme People's Court: Siemens International Trade (Shanghai) Co., Ltd. v. Shanghai Golden Landmark Co., Ltd. (Case concerning application for recognition and enforcement of a foreign arbitral award). See also, Article 9 of the Opinions of the Supreme People's Court on Providing Judicial Guarantee for the Building of Pilot Free Trade Zones, which specifies that where two wholly foreign-owned enterprises registered in FTZ agree that any commercial dispute shall be submitted to arbitration out of China, the relevant arbitration agreement shall not be determined to be null and void for the reason that their dispute has no foreign-related factors. Normally, if domestic parties submit a case concerning contractual disputes and other disputes over rights and interests in property that have no foreign-related factors to a foreign arbitration institution for arbitration or an ad hoc arbitration in a foreign country, the people’s court would determine the relevant arbitration agreement to be null and void. The Supreme People’s Court, Answer to Practical Questions in the Trial of Foreign Related Commercial and Maritime Cases, Article 83, 2008.
[8] Article 272 of The Civil Procedure Law of the People's Republic of China (2017 Amendment), Article 68 of Arbitration Law of the People's Republic of China (2017 Amendment).
[9] The specific circumstances are (i) The contract between the parties does not include an arbitration clause or the parties have not reached any written arbitration agreement after a dispute arose; (ii) The respondent is not notified to appoint an arbitrator or of the conduct of arbitration procedure or fails to present its case, which is not attributable to the fault of the respondent; (iii) The composition of the arbitration tribunal or the arbitration procedure is not in conformity with arbitration rules; and (iv)the matters arbitrated are outside the scope of an arbitration agreement or the arbitral institution has no arbitration power.
[10] Jia Gu, The "butterfly effect" of overseas arbitration institutions administrating arbitration cases in China (境外仲裁机构在华管理仲裁案件的“蝴蝶效应”), 2019, Pkulaw.com, CLI.A.231367.
[11] No. 13 [2013] of the Civil Division IV of the Supreme People's Court, issued on 25 March 2013.
[12] Article 16 reads as follows “The examination of the effectiveness of an agreement for arbitration which involves foreign interests shall be governed by the laws agreed upon between the parties concerned; if the parties concerned did not agree upon the applicable laws but have agreed upon the place of arbitration, the laws at the place of arbitration shall apply; if they neither agreed upon the applicable laws nor agreed upon the place of arbitration or the place of arbitration is not clearly agreed upon, the laws at the locality of the court shall apply.” Interpretation No. 7 [2006] of the Supreme People’s Court, effective from 8 September 2006.
[13] No. 74 [2013] of the Civil Division IV of the Supreme People's Court, issued on 5 December 2013.
[14] No. 83 [2020] of the Civil Division of the Shanghai Intermediate People’s Court, issued on 29 June 2020.
[15] Terence Wong and Ya’nan Zhao. Keep It Open: Recent Rulings Reaffirm Validity of Foreign Arbitration Seated in China. Lexology, 12 October 2020.
[16] No.12 [2007] of the Supreme People’s Court, effective from 1 April 2007.
[17] No. 62 [2015] of the Civil Division IV of the Guangzhou Intermediate People’s Court (trial at first instance), issued on 6 August 2020.
[18] Ke Hu and Xi Lin. Chinese Law or No Law: The Lex Arbitri for Arbitrations Conducted by Overseas Arbitration Institutions in Mainland China. Kluwer Arbitration Blog, 9 September 2015.
[19] Zhang Shouzhi, Huang Tao and Xiong Yan. The Asia-Pacific Arbitration Review 2021: China. Global Arbitration Review, 11 June 2020.