China

The release of the new arbitration rules of the China International Economic and Trade Arbitration Commission (CIETAC) in February this year was the most significant development for foreign parties in China this past year. Although the amendments are less significant than the changes made in the 2005 version of the rules, the new rules, which came into force on 1 May 2012, are nonetheless consistent with a steady pattern of the internationalisation of Chinese arbitral practice and procedure.

Such developments are not surprising given the continued popularity of arbitration for resolving commercial disputes in China, and of the increase in China-related arbitration cases in general. Nevertheless, and despite this, the law of the People's Republic of China (PRC), and specifically CIETAC arbitration, continue to demonstrate their own distinctive peculiarities.

This chapter highlights the key arbitration developments and trends since 2011 in China.

CIETAC caseload

CIETAC has for many years been the leading arbitration commission for foreign-related arbitrations in China.¹ In recent years, its arbitration caseload has been increasing, although the recent number of foreign-related cases as a percentage of total cases is much lower than in previous years (for example, for the period from 2002 to 2004, CIETAC's caseload consisted of more foreign-related than domestic cases). According to CIETAC, this is due to many disputes now involving foreign parties that have established joint ventures and wholly foreign-owned enterprises which are categorised as domestic disputes.

According to CIETAC, in 2011 it accepted 1435 cases, of which 965 were domestic cases and 470 were foreign-related cases.² Around 90 per cent of these cases were resolved under the auspices of CIETAC (ie, a final award was rendered, or the arbitration was resolved following, for example, a successful mediation). Over the last ten years, CIETAC's total caseload has more than doubled. However, CIETAC did suffer a small dip in its caseload figures in 2010, which, according to CIETAC, was caused by fewer contracts being entered into and parties deciding to settle their disputes without recourse to arbitration, both of which were in part due to the effects of the economic crisis. CIETAC expects its caseload to increase further in 2012, in parallel with the expected economic recovery and an increase in the number of investment contracts being entered into which refer disputes to CIETAC arbitration.

Revised CIETAC Panel of Arbitrators

CIETAC revises its Panel of Arbitrators every three years. A new Panel of Arbitrators became effective on 1 May 2011. It consists of just under 1,000 arbitrators, of which foreign arbitrators now make up approximately 25 per cent, although the number of foreign arbitrators actually accepting CIETAC arbitration appointments continues to be low. Under the CIETAC rules, however, parties can only nominate or appoint arbitrators from outside the Panel of Arbitrators by agreement, and subject to confirmation by the chairman of CIETAC.

The new CIETAC arbitration rules

To meet the demand for China-related arbitrations and to improve its arbitration procedure, CIETAC issued its revised arbitration rules in February 2012, after a longer than expected drafting process. The new rules come into force on 1 May 2012, seven years after the previous edition.

CIETAC's new arbitration rules expand on previous improvements to its arbitration procedure through new features. These features are in line with modern international arbitration practice and are consistent with rules from a number of other major institutional arbitration bodies.

The following are the main changes to the new CIETAC rules:

Interim measures

Under PRC law, there are only two types of interim measures available in arbitrations in China: preservation of (i) property and (ii) evidence and only the Chinese courts (not the tribunal or arbitration commission) can grant them. The new CIETAC rules include provisions empowering the tribunal, on a party's application, to order any interim measure it deems necessary or proper in accordance with the law that applies. This will be useful for arbitrations outside China, although it remains to be seen if such orders can be enforced (whether as awards or otherwise) in China. For arbitrations seated in China, under the current civil procedural law, it is unlikely that more extensive interim measures will be available from the tribunal.

Language of the arbitration

Under the previous CIETAC rules, where parties failed to agree on the language of the arbitration, the default language would be Chinese. This was unattractive to foreign parties because it limited the pool of foreign arbitrators to those fluent in Chinese. The new rules seek to address this by giving CIETAC the power to designate any language, in the absence of party agreement. In theory, this is sensible because it tries to ensure that a suitable language is adopted for each case, after taking into account factors such as the nationality of the parties and the subject matter in dispute.

Seat (place) of arbitration

In the absence of party agreement on the seat (place) of arbitration, or where the agreement is ambiguous, CIETAC can now choose any location. This reflects the fact that each year, CIETAC administers cases seated outside mainland China - although the number of these cases is nominal, it is likely to grow.

Summary procedure

This has been revised, with the main revision being that, in the absence of party agreement, the summary procedure will now apply to any case where the amount in dispute does not exceed 2 million renminbi. Previously, the threshold was 500,000 renminbi. This takes into account the demand among arbitration users for expedited procedures and is in line with the higher threshold brought in by, for example, the new SIAC rules.

Multi-party appointment of arbitrators

The previous rules, as drafted, could lead to unfairness in a deadlock situation, ie, if one side (typically, the respondent side) failed to appoint its party-arbitrator, it could lose its right to appoint, while the other side (typically, the claimant side) could retain this right. The new rules seek to avoid this by providing that if either side defaults in appointing its party-appointed arbitrator (or if both sides fail jointly to entrust the chairman of CIETAC to appoint), then the chairman of CIETAC will appoint all three arbitrators.

Consolidation

Under the new rules, CIETAC may consolidate two or more CIETAC arbitrations into one arbitration, either on the request of one party and with the agreement of all other parties, or if CIETAC considers it necessary to consolidate and all parties consent. However, the effect of the consolidation provisions are likely to be limited, since a consolidation is possible only if all the parties consent at the time. A recalcitrant party can, therefore, easily derail or delay an arbitration by refusing to provide such consent.

Arbitration and mediation

According to CIETAC, each year approximately 20 to 30 per cent of its caseload is resolved through a combination of mediation (conciliation) and arbitration. Given this relative success, the new CIETAC rules seek to clarify this process further. For example, parties can choose, once a tribunal has been constituted, to mediate their dispute without the arbitral tribunal, and may seek help from CIETAC to conduct the mediation (if the mediation fails, then the arbitration continues).

Substantive law

The new CIETAC rules now expressly provide that the parties are free to agree on the governing law of the contract (which is consistent with PRC law, save for certain exceptions, as discussed below), and where there is no agreement, or the agreement is in conflict with a mandatory provision of the law, then the tribunal shall determine the substantive law. PRC law provides that domestic contracts must always be governed by PRC law. Although the parties to a foreign-related contract are in general free to choose the substantive law governing the contract, this is subject to certain exceptions ie, PRC law must apply to the following contracts: Sino-foreign equity joint venture contracts and Sino-foreign cooperative joint venture contracts.³

CIETAC in Beijing or sub-commission

Under the previous CIETAC rules, where the parties had failed to agree on the administering body, ie, CIETAC in Beijing or one of CIETAC's sub-commissions, the claimant was then given the choice of where to have the arbitration administered (ie, CIETAC in Beijing or at one of the sub-commissions). This allowed the claimant the opportunity to select its most preferred venue, which was sometimes perceived as causing unfairness to the other side. This rule has been amended by the new CIETAC rules as now, absent party agreement, or where such agreement is ambiguous, the ‘Secretariat of CIETAC' will administer the case. Although not expressly defined in the new rules, it is understood that the Secretariat of CIETAC refers to the Secretariat of CIETAC in Beijing. It is understood that this amendment to the rules generated much internal debate between CIETAC in Beijing and the various sub-commissions; a likely outcome of the change will be that CIETAC in Beijing will handle more cases, whilst the sub-commissions will see a decrease in their caseload.

In revising its rules, CIETAC has considered the changes in other international arbitration rules, such as the UNCITRAL, SCC, ICC, HKIAC and SIAC rules. Naturally, due in part to the constraints of PRC law and CIETAC's distinctive character, CIETAC has not adopted all the amendments in other arbitration rules (ie, there are no provisions for appointing emergency arbitrators). Overall, the latest amendments are less significant than those introduced in the previous version in 2005. Nonetheless, the main amendments will likely be welcomed by CIETAC users and are in line with amendments to other international arbitration rules.

Investment treaty arbitration

Last year (July 2011) saw a final award rendered in the well-known ICSID arbitration, Tza Yap Shum v The Republic of Peru,⁴ which was brought under the bilateral investment treaty (BIT) entered into between China and Peru (China-Peru BIT). This case dealt with a number of important issues that arise in the context of many BITs entered into by China with other states.

The case concerned Mr Tza Yap Shum, who was the owner of a 90 per cent stake in a fish flour company, TSG Peru SAC (TSG). A dispute arose when Peru's national tax administration allegedly froze around US$4 million in TSG's bank accounts, a sum which the administration claimed was owed by the company in tax. Mr Tza claimed that the administration confiscated the company's assets while it was trying to challenge the charge within the legally prescribed time limit. Moreover, he claimed that the confiscation paralysed the company and amounted to an expropriation of the company, for which he demanded US$20 million in compensation.

On 19 June 2009, the tribunal rendered its Decision on Jurisdiction and Competence in relation to its interpretation of the China-Peru BIT. The tribunal held that the arbitration provision within the China-Peru BIT applied to a Hong Kong citizen such as Mr Tza and that it had jurisdiction over the expropriation claim (although the tribunal did agree with a number of Peru's other objections).

In its final award on the merits rendered last year, the arbitral tribunal found that the administrative seizures ordered by Peru's tax authority constituted indirect expropriation under the China-Peru BIT. Mr Tza was awarded damages in the sum of approximately US$786,000 plus interest (such figure being reflective of the adjusted book value of TSG immediately prior to the expropriatory acts). Peru subsequently applied for the annulment of the award, and a provisional stay of the enforcement of the award was granted pending the result of that application. An ad hoc ICSID annulment committee was constituted in January 2012 and a decision is still pending.⁵

Also in 2011, the first known investment treaty claim against China was filed at ICSID, by a Malaysian company, Ekran Berhad. The dispute reportedly related to a lease over land in the Chinese province of Hainan, with an estimated value of US$6 million. The lease was reportedly revoked by the local authorities in 2004 on the ground that the investor had failed to develop the land as stipulated under the local legislation. However, the case was suspended shortly after, on 22 July 2011, following agreement by the parties.

This year will see the continuation of the only other China-related investment dispute that has been known to have been commenced under the relevant BITs between China and other countries: China Heilongjiang International Economic & Technical Cooperative Corp, Beijing Shougang Mining Investment Company Ltd and Qinhuangdaoshi Qinlong International Industrial Co Ltd v Mongolia.

New legislation

On 1 April 2011, the PRC Law on the Application of Law for Foreign-related Civil Relations (the PRC Law on Conflict of Laws) came into force. This statute consolidated Chinese conflict of law rules with respect to foreign-related contracts, which were previously scattered across various statutes, such as the PRC General Principles of Civil Law (1987) and certain interpretations and other documents issued by the Supreme People's Court. For domestic contracts, PRC law will always apply.

The PRC Law on Conflict of Laws is relevant to China-related arbitration as follows:

Substantive law

As already discussed above, under PRC law, parties to a foreign-related contract are free to elect, subject to certain restrictions, any law as the substantive law of the contract. In the absence of express choice by the parties, article 41 of the PRC Law on Conflict of Laws states that the substantive law shall be:

• the laws at the habitual residence of the party whose fulfillment of obligations can best reflect the characteristics of the contract; or
• other laws which have the closest relation with the contract.

This rule applies to both litigations and arbitrations in China where the determination of the applicable substantive law is at issue.

Proof of foreign law

Historically, most arbitrations in China have largely involved Chinese law, which is a law which the arbitrators and counsel will usually be familiar with. However, in recent years, issues of foreign law have increasingly arisen in foreign-related arbitrations held in China. Under PRC law, parties who choose to apply foreign law shall bear the burden of proof of the particular foreign law that they intend to apply, and, under article 10 of the PRC Law on Conflict of Laws, the following bodies shall ascertain the content of such foreign law: the People's Courts, the arbitration institutions and the relevant administrative authorities. If the foreign law cannot be ascertained by the methods set out under PRC law⁶, or there are no relevant rules in the applicable foreign law, then PRC law shall apply.

Law governing the arbitration agreement

Under PRC law, the agreed law of the parties will be the law that will govern a foreign-related arbitration agreement. In the absence of party choice, article 18 of the PRC Law on Conflict of Laws states that the governing law shall be either:

• the law of the place where the arbitration commission is located; or
• the law of the place of the arbitration.

However, these new provisions have been criticised as:

• it deviates from the previous position under PRC law⁷ that the law governing the validity of a foreign-related arbitration agreement shall be, in order of priority: the law agreed by the parties, the law of the seat of the arbitration or the law of the place of the court;
• it is not clear whether article 18 of the PRC Law on Conflict of Laws is intended to change the previous position under PRC law (as stated immediately above);
• it fails to clarify how the governing law should be determined if the place of the arbitral institution differs from the seat of arbitration (ie, an ICC arbitration seated in London); and
• it fails to clarify what the proper law should be if the arbitration agreement in question is silent not only on the parties' choice of governing law, but also the seat of arbitration and the arbitration institution.

It remains to be seen how the issues above will be dealt with and determined by PRC courts (and tribunals) in the future.

Restrictions on PRC counsel

In 2010, the Ministry of Justice (MoJ) issued the Measures For Punishing Lawyers and Law Firm's Illegal Acts (Measures), and it remains a topic of great controversy for Chinese arbitration practitioners today. The Measures introduced a new restriction upon PRC local counsel whereby a registered PRC lawyer who serves as an arbitrator or has previously served as an arbitrator at one arbitration commission in China may be prevented from acting as an ‘arbitration agent' (effectively, as arbitration counsel) in any case administered by that arbitration commission. This limits the breadth of work a PRC lawyer can engage in. In addition, PRC lawyers, in particular those with invaluable experience and technical know-how, are now hesitant to acting as arbitrators or being listed on the arbitrator panels of Chinese arbitration commissions.

It is understood that the Measures were hastily drafted by the MoJ and that there was no consultation process to include views and comments from Chinese arbitral bodies (including CIETAC). It is also understood that the MoJ has recognised the limitations of the Measures and the effect on the PRC arbitration community, and, as such, the impact of the Measures has been discussed by the relevant authorities, although no subsequent action has been taken.⁸ Nevertheless, at the time of writing, there has been no known case where these specific provisions of the Measures have been applied.

Future developments

As discussed above, under current PRC law, there are only two types of interim measures available to parties to arbitration in China, namely perseveration of property and preservation of evidence. Currently, pre-arbitral interim measures of protection are not available under PRC law. However, in October 2011, the Standing Committee of the National People's Congress (NPC), China's legislature, reviewed for the first time a draft amendment to the PRC Civil Procedure Law 2008.⁹ Proposed amendments include the power of the courts to order property preservation measures before an arbitration is commenced, in addition to the power to order injunctive relief. It is worth noting that the NPC had included in its legislative agenda a proposal to revise the PRC Arbitration Law. However, at the time of writing there has been no official announcement of when an amended PRC Arbitration Law will be promulgated.

Notes

1

Under PRC law, an arbitration is generally considered “foreign-related” if it involves: at least one foreign party; or if all the parties are Chinese parties, where: either the facts establishing the legal relationship between the parties occurred in a foreign country; or the subject matter in dispute is in a foreign country.

2

Despite the recent general downward trend of foreign-related cases as a percentage of total cases, as outlined above, the 2011 figure of 470 foreign-related cases is an increase on the 418 foreign-related cases from the previous year.

3

Article 126 of the PRC Contract Law (1999).

4

ICSID Case No ARB/07/6.

5

A procedural history can be found at http://icsid.worldbank.org

6

Article 193 of the Supreme People's Court Trial Opinions on Several Issues on the Implementation of the PRC General Principles of Civil Law (1988) which sets out the methods used to ascertain which foreign law is applicable, including: provision by the parties, by embassies (in the foreign country whose law will apply, or of that foreign country in China) and by legal experts, whether foreign or Chinese.

7

Article 16 of the Supreme People's Court's Interpretations of Several Issues in Applying the Arbitration Law of the PRC (2006).

8

See Moser J, Michael (ed), Business Disputes in China, Third Edition (Juris, 2011), pg.57.

9

See http://www.npc.gov.cn/npc/xinwen/syxw/2011-10/29/content_1678367.htm