Financial Arbitration in China: Actuality and Development
This is an Insight article, written by a selected partner as part of GAR's co-published content. Read more on Insight
Outlook of financial arbitration
With the development of China’s economy, the opening of Chinese financial markets and the emergence of innovative products and ways of transactions, financial disputes correspondingly continue to increase. As an alternative dispute resolution (ADR) method, arbitration plays an increasingly important role in the field of financial dispute resolution in China.
The caseload and the subject matter of the disputes handled by arbitration in domestic arbitration institutions of China continues to increase, with the statistics showing that more than 540,000 arbitrations have been accepted and administrated in 2018, including more than 120,000 financial cases.
The Shanghai International Economic and Trade Arbitration Commission Shanghai International Arbitration Center (SHIAC), pioneer of the foreign-related commercial arbitration institutions in China, accepted 381 financial cases in 2018, accounting for 34 per cent of the total cases received. The disputed amount reached 7.888 billion yuan, accounting for 39.2 per cent of the total. The types of disputes, which cover a broad range, include stocks, bonds, funds, futures, insurance, trusts, financial leasing, financial derivatives, entrusted asset management, commercial factoring, settlement and collection of credit card account, internet finance, bank loans, equity entrustment, and value adjustment mechanism, among others. Nevertheless, in terms of quantity, traditional lending disputes still account for a large proportion.
Taking London and Hong Kong, two globally recognised international centres of finance and arbitration, as the sample of a comparative study, 20.55 per cent of the cases accepted by London Court of International Arbitration (LCIA) in 2016 were banking and financial cases, while 29.3 per cent of the cases accepted by the Hong Kong International Arbitration Centre (HKIAC) in 2016 were financial cases. Thus, financial disputes accounted for substantively large proportions in the these two centres.
Although we have mentioned the concept of financial cases, there is neither a unified definition nor classification of the financial cases by researchers or practitioners. It is worth noting that the latest provisions of the Supreme People’s Court (SPC) on the Jurisdiction of Shanghai Financial Court, issued on 7 August 2018, can, to a certain extent, be seen to be the Chinese judicial organs’ understandings of ‘financial cases’, which was of great significance nationwide. According to the these provisions, disputes relating to securities, futures, trusts, insurance, mercantile papers, letters of credit, financial loan contracts, bank cards, financial leasing contracts, entrusted asset management contracts, pawns, among others, have been deemed as traditional financial disputes. Independent guarantees, commercial factoring, private equity funds, non- bank institutions’ online payment, online lending and online crowd funding for equities have been deemed as new types of financial disputes.
Although arbitration has been promoted to a certain extent in the financial field, the function and role thereof is still limited compared to courts. Taking Shanghai as an example, from 2013 to 2017, the number of financial cases accepted by Shanghai courts grew at an average annual rate of 51 per cent. In the past five years, a total of 478,000 financial cases were concluded. It can be seen that, as a way of dispute resolution in financial industry, arbitration still has a very broad space for prospective development in China.
The advantages of arbitration for financial dispute resolution
Commercial arbitration has outstanding advantages compared to the litigation, especially regarding professionalism, confidentiality, flexibility and internationally enforceability.
While resolving disputes relating to finances such as securities, futures, insurance and trust, arbitrators shall have professional and comprehensive knowledge and career backgrounds. One of the characteristics of arbitration is that parties can choose industry experts to hear the case. If the arbitrator has both financial and legal knowledge, it would be beneficial to accurately grasp the nature of the transaction, clarify the controversies of the dispute and find a proper solution to the dispute. The current 965 arbitrators of the SHIAC are from 74 countries and regions around the world. There are 514 arbitrators with a financial background, accounting for more than 53.2 per cent, of which 62 per cent are from mainland China and 38 per cent from abroad (foreign countries, Hong Kong, Macao and Taiwan). The specialities of arbitrators cover all traditional and emerging financial industries.
Confidentiality means the whole arbitration is proceeded in a private and confidential way. Unless with the consent of both parties, any third party is excluded from the hearing, documentations, opinions of the parties and the arbitral awards. Confidentiality limits the collateral damage of disputes, especially in financial transactions where the counterparty of the transaction is non-specific and have special needs for trade secret protection, such as private equity investment and family wealth management.
For international financial disputes, arbitral awards are recognised and enforced under New York Convention, the procedure of which is simpler compared to enforcing a judgment overseas. Moreover, the arbitral procedure is more flexible and efficient than litigation, with parties of cross-border financial disputes being able to get rid of complicated and lengthy court litigations.
When focusing on China, the emergence and development of two major types of financial disputes is striking. One is the financial leasing case. The SHIAC began accepting the first financial leasing arbitration case in 2009 and received nearly 100 cases to 2016. The amount in dispute was close to 400 million yuan. The data for the past five years shows an upward trend. More than 10 financial leasing companies involved in such cases are currently foreign-invested enterprises with considerable scales and influences in the industry. The amount of financial leasing cases in China has kept increasing while the laws and regulations of financial leasing has grown out of nothing to become a relatively mature law system. In such development, the SHIAC had realised that the new born financial leasing market is in urgent need for protection by legislation and should also keep an eye on the phenomena of breach of contract and lack of good faith. From the principle of maintaining stable performance of transactions and orderly development of the industry, the relevant cases have been properly handled according to the laws in effect at that time. Deutsche Leasing (China) Co, Ltd, established in China by Stadt Sparkasse, one of the world’s largest banking groups, commented in its in-house briefing several years ago: ‘Although China’s financial leasing legal system is not perfect, it is gratifying that [the] SHIAC has made a fair award and has been effectively enforced by Chinese courts’.
The other type of dispute is asset management. In recent years, with the increasing understanding and acceptance of finance, the asset management business has grown and been diversified in China. Asset management products include trust plans, asset management plans by security brokers, asset management by special accounts, bank financial plans and insurance asset management plans, among others. The final target assets involved include standardised and non-standardised debt assets, equity assets and so on. Moreover, with the rapid development of information technology, the asset management business has formed a geographically broad financial network with a complex structure through global and regional financial centres and a large number of offshore financial markets.
The emergence of asset management disputes has brought many new problems and thinking to arbitration practitioners. The SHIAC accepted an arbitration in which a fund company claiming against a securities company for the breach of pledge-style repurchase agreement contract. The securities company filed a lawsuit challenging the validity of the arbitral clause by arguing that the arbitral clause should only bind assets management plans raised by the fund company, instead of the fund company itself. Ultimately, the Shanghai Financial Court confirmed that the disputed arbitral clause should be valid and bind the fund company and the securities company. However, as to the trading practices showed in the case, the fund company, fund products and the investors may have cross-claims against the other parties under the breach of contract issues, thus the issue of jurisdiction may become a topic that causes discussions in the arbitration fields.
Support for financial arbitration from China’s judiciaries
Through a set of laws, regulations, judicial interpretation and other documents, the Chinese judiciary is gradually improving the system of financial dispute litigation and alternative dispute resolution solutions.
The Shanghai Financial Court was established on 20 August 2018. By the end of 2018, the Shanghai Financial Court had accepted 1,897 cases, with a total amount of 25.2 billion yuan. The main types of disputes covered misrepresentation in securities transactions, loan, corporate bond transactions, stock pledge-style repurchase, financial leasing and business trust disputes, among others.
The Shanghai Financial Court is responsible for judicial reviews on financial arbitration awards of domestic and foreign arbitration institutions, including the SHIAC. It accepts applications for judicial review on financial arbitration and the application for recognition and enforcement of foreign financial arbitration awards. The establishment of the Shanghai Financial Court is facilitated for the centralised jurisdiction of financial arbitration judicial review cases and is to apply a unified standard of application of laws in the issues of setting aside, non-enforcement of arbitral awards and relevant issues thereof in a more supportive attitude towards arbitration while still fulfil its power of legal supervision, which is a practical way of fulfilling obligations under New York Convention.
Shanghai’s efforts to become international dispute resolution centre
Finance is the core function of Shanghai and to build Shanghai into an international financial centre has been set as a national goal. In order to meet the actual demand of a financial centre, Shanghai promulgated the ‘Shanghai Action Plan to implement the National Measures for Further Enlarging Opening up Policy and Accelerating the Establishment of a New and Open Oriented Economy’ and formed 32 specific measures in six aspects of the opening up of the financial industry. Meanwhile, the goal to build Shanghai into the global asset management centre has also been mentioned.
In 2015, the Chinese State Council proposed in the Shanghai Free Trade Zone Plan for Deepening Reform, to accelerate the process of Shanghai becoming the bellwether of Asia-Pacific arbitration serving the global market.
In August 2016, the Shanghai municipal government issued a clear plan for the construction of the Shanghai International Trade Center during the 13th Five-Year Plan period and announced to build an Asia-Pacific international commercial dispute resolution centre. To cultivate widely-recognised commercial arbitration and mediation institutions in Shanghai, increase the professional service capabilities and international influence, attract and gather internationally renowned commercial dispute resolution institutions, the plan mentioned building an international-oriented commercial dispute resolution platform.
In October 2017, Shanghai issued its action plan in the service of the national ‘Belt and Road’ scheme and announced to build a Shanghai Belt and Road international arbitration centre.
In order to accelerate the establishment of Asia-Pacific arbitration centre serving the global market, deepen the construction of the Shanghai International Commercial Dispute Resolution Center and build an international-oriented commercial dispute resolution platform, the SHIAC initiated the establishment of the Shanghai International Dispute Resolution Center in 2018. Based on this new platform, the SHIAC will invite well-known foreign mediation and arbitration institutions to gather together and simultaneously promote China’s practice of diversified dispute resolution mechanisms including mediation and arbitration. It is foreseeable that such a new platform will promote a pro-business environment with rule of law insurance in Shanghai and help to resolve international commercial disputes including financial disputes.