Along with China’s steady economic growth and expanding relationship with the outside world, commercial disputes have occurred inevitably as the by-products of economic development. The past year has witnessed an increase in caseload accepted by arbitration institutions in mainland China. China continues its leading role in resolving disputes through arbitration in the Asia-Pacific region.
The promulgation of the Arbitration Rules of China International Economic and Trade Arbitration Commission (CIETAC) in May 2012 (the 2012 CIETAC Rules) has led to a year long internal dispute between CIETAC Beijing Headquarters (CIETAC Beijing) and its former Shanghai and South China Sub-Commissions. Arbitration users at home and abroad have expressed great concern over the uncertainty and risk created by the split. Indeed, there were conflicting judicial decisions by various local courts on the validity of arbitration agreements and the enforcement of arbitral awards so affected. The Supreme People's Court of China (SPC) was called upon to set rules clarifying the allocation of jurisdiction faced by CIETAC Beijing and its former Sub-Commissions for the pre-split and post-split period, and eventually a special pre-reporting mechanism was established to address the issue, though such mechanism still lacks the desired degree of transparency.
However, it appears that the dispute over the split did not prevent CIETAC and its former Sub-Commissions from aligning itself more closely to the internationally accepted standard. CIETAC has embraced a sharp increase in caseload. The CIETAC South China Sub-Commission – now the South China International Economic and Trade Arbitration Commission or Shenzhen Court of International Arbitration (SCIA) – is attempting to establish a legal person governance structure so as to operate as a non-profitable arbitration institution according to standards adopted by major international arbitration institutions in other jurisdictions. CIETAC Shanghai Sub-Commission – now the Shanghai International Economic and Trade Arbitration Commission or Shanghai International Arbitration Center (SHIAC) – has made some essential breakthroughs in liberalising arbitration practice by promulgating its own set of rules of arbitration, including particularly the China (Shanghai) Pilot Free Trade Zone Arbitration Rules.
There are some other new developments as well. This chapter serves to highlight the key developments and newly emerged trends in China over the past year.
Caseload of arbitration institutions in mainland China
For several years, the overall caseload of all arbitration institutions established in mainland China has been ignored or hardly noticed by foreign arbitration users. This is attributed to the fact that CIETAC has played a dominant role in handling foreign-related arbitration cases, and local arbitration commissions generally received a smaller number of foreign-related cases compared to CIETAC. However, it is worth noting that the situation has changed.
According to statistics published by the Office of Legal Affairs of the State Council, which has long been assigned with the mission to guide China's arbitration work nationwide since the implementation of the Arbitration Law in 1995, there were 219 arbitration commissions (including CIETAC and CMAC) located in major municipalities in Mainland China in 2012 and 96,378 arbitration cases in 2012, with the total amount in dispute being 131.5 billion renminbi.1 In 2013, the number of arbitration commissions reached 225 and they accepted 104,257 cases with the total amount in dispute being 164.6 billion renminbi.2
The arbitration cases handled by China's arbitration commissions were overwhelmingly domestic cases. Foreign-related arbitration cases taken in 2012 and 2013 numbered 1,521 and 1,596 respectively, which make up only 2 per cent of the overall caseload in 2012 and year 2013 respectively. In 2013, there were 55 arbitration commissions accepting foreign-related arbitration cases.3
The huge number of arbitration cases accepted by China's arbitration commissions is proof of the fact that arbitration is becoming a popular means of dispute resolution at the choice of commercial businesspersons. Officials from China's administrative and judicial bodies have vowed to adopt a pro-arbitration policy in order to enable arbitration to fully develop as an efficient dispute settlement platform. The ultimate goal is to enhance a fair competition environment, which is necessary for economic growth. For example, the president of the SPC, Zhou Qiang, noted in his keynote speech at the Asia Pacific Regional Arbitration Group Conference in Beijing in June 2013 that arbitration and the court system should complement one another, and that they should be partners, not opponents. He further proclaimed that the two limbs should work together to strengthen domestic and international cooperation, share with one another their dispute resolution experiences, and improve their professional competence so as to provide a stronger effort for the development of international legal order for trade and investment.4 Indeed, the importance of formulating and maintaining a proper policy favoring arbitration in China can never be underestimated, if one takes into account the existing gap between arbitrations in China and those in other jurisdictions.
As the leading arbitration institution in China, CIETAC created a new record in history by accepting a total of 1,256 arbitration cases in 2013, including 375 foreign-related cases and 881 domestic cases. That represents an 18.5 per cent increase (by 196 cases) from 2012. Among the above, CIETAC Beijing accepted 1,058 cases, a 8.51 per cent increase in the number of cases accepted in 2012, including 322 foreign-related cases (up by 19 cases) and 736 domestic cases (up by 64 cases). The CIETAC Secretariat Shanghai Office (which is distinct from SHIAC) accepted 159 cases (up by 122 cases) including 43 foreign-related cases and 116 domestic cases. The CIETAC Secretariat South China Office (which is distinct from SCIA) accepted 18 cases (up by two cases) including seven foreign-related cases and 11 domestic cases. The CIETAC Southwest Sub-Commission in Chongqing accepted 11 cases, including three foreign-related cases and eight domestic cases. The CIETAC Tianjin Arbitration Center accepted 10 cases, all domestic. No case was accepted by the CIETAC Hong Kong Arbitration Center in 2013. Of all the domestic cases accepted by CIETAC in 2013, over 80 per cent involved foreign investment elements, with one party or both parties being foreign-invested enterprises. The total amount claimed in all cases accepted by CIETAC in 2013 reached 24.4 billion renminbi, representing an increase of 58 per cent, or 8.9 billion renminbi, from 2012. The parties involved came from 56 countries and regions, up by 10 countries or regions from 2012.5
The SCIA took 242 and 245 arbitration cases in 2012 and 2013 respectively, and handled 300 mediation cases in 2012 and 400 mediation cases in 2013. SHIAC accepted 505 arbitration cases in 2012, and in 2013 its arbitration caseload dropped to 397. It seems that CIETAC's announcement on the revocation of authorisation6 has had a substantial impact on the caseload of SHIAC in 2013.
The Beijing Arbitration Commission (BAC) accepted 1,627 arbitration cases in 2013, with a total amount in dispute of 12 billion renminbi. The figure amounts to half the total amount in dispute in all CIETAC cases. While most of the cases are purely domestic, BAC seized 44 foreign-related arbitration cases, representing 2.7 per cent of its caseload.7
Over the past 10 years, Wuhan Arbitration Commission (WHAC) has always accepted the greatest number of arbitration cases in Mainland China. The predominant of arbitration cases are domestic. According to the available statistics, WHAC accepted 77,391 arbitration cases from 1997 to 2011. In 2012, it accepted 10,608 cases; and in 2013, 10,469 cases.8 Other arbitration commissions that handle large volume of arbitration cases include the Guangzhou Arbitration Commission, the Shanghai Arbitration Commission, the Shenzhen Arbitration Commission, the Xiamen Arbitration Commission, the Qingdao Arbitration Commission, the Harbin Arbitration Commission, the Chengdu Arbitration Commission, the Changsha Arbitration Commission, the Zhengzhou Arbitration Commission and the Xian Arbitration Commission.
The improvement of the Arbitration Rules
In the past year, a few leading arbitration commissions have published new sets of rules of arbitration or proposed amendments to existing rules for the public to comment on.
In October 2013, the Beijing Arbitration Commission (BAC) circulated the new Draft BAC Arbitration Rules (the Draft Remedies) for public comments aiming at revising its existing Rules published in 2008. As explained by the BAC, the draft includes a number of improvements to the existing rules, and efforts were made to align the rules with the latest developments of arbitration rules of other renowned arbitration bodies in the world such as the ICC International Court of Arbitration.9 The proposed major changes include, inter alia, the following:
The written agreement requirement
In line with the revised UNCITRAL Model Law and Arbitration Rules, the BAC attempted to enlarge the scope of arbitration agreement. The draft rules recognise that the writing requirement would be deemed to be fulfilled where, in the exchange of the application for arbitration and the statement of defence, one party asserts the existence of the Arbitration Agreement and the other party does not deny this
A broader authority granted to arbitral tribunals
The Draft Rules aim to confer maximum flexibility over procedural matters on arbitral tribunals. In relation to matters not expressly provided for in the Rules, the BAC or the arbitral tribunal shall have the power to conduct the arbitral proceedings in a manner it considers appropriate.
Following CIETAC's recent move to allow truncated tribunals to issue arbitral awards, the draft proposed to insert a provision to the same effect: if, after the conclusion of the last oral hearing, an arbitrator of a three-member arbitral tribunal is unable to participate in the deliberation and render the award due to his or her demise or removal from the BAC's panel of arbitrators or other reasons, then provided that consents are obtained from both parties and the chairman of BAC, the remaining two arbitrators may continue the arbitral proceedings and render the award.
Stenographers in oral hearings
The minutes currently adopted by many Chinese arbitration commissions are only brief summaries of hearings, which may not fully meet parties' needs in disputes of high complexity or highly techincal in nature. In order to provide the parties with a more detailed record and increase the transparency of oral hearings, the Draft Rules added a special provision allowing the use of stenographers. Practitioners may find stenographer reporting very helpful in recording all statements that have been made by the participants of the oral hearing.
Consolidation of arbitrations
The consolidation of arbitrations has already become an important stipulation in the arbitration rules of quite a few renowned international arbitration institutions. To catch up with the latest development, the BAC revision draft introduced this approach with detail-oriented provisions. Generally, at the request of a party and where all the parties concerned consent, or where the BAC considers necessary and where all parties concerned consent, the BAC may decide to consolidate two or more pending arbitrations which are governed by the Rules into a single arbitration. Apart from the above, the BAC revision draft also introduced the possibility of consolidating the hearings of two or more arbitration cases with the consent of all parties, provided the members of the arbitral tribunals are the same.
The proposed changes to the existing arbitration rules have reflected the BAC's ambition to play a leading role in the frontier of commercial arbitration in China. Nevertheless the provisions to be introduced are more or less moderate and enterprising within the acceptable framework of China's current arbitration laws.
In contrast, more innovative and constructive improvements of the existing rules of procedure can be found in the China (Shanghai) Pilot Free Trade Zone Arbitration Rules (the 2014 Pilot Rules), which became effective on 1 May 2014.
After splitting from CIETAC in 2012, SHIAC has made several bold and innovative attempts to become one of the most advanced arbitration institutes in China. These include the diligent promulgation and revision of its own arbitration rules since its split from CIETAC and the establishment of the China (Shanghai) Pilot Free Trade Zone Court of Arbitration (the Pilot Court) in October 2013. Commentators noted that the 2014 Pilot Rules have adopted arguably the most advanced international arbitration practices, representing a very positive and innovative development for the arbitration industry in China.10 In strong support of the 2014 Pilot Rules, the Shanghai mayor hoped that SHIAC and its Pilot Court would accumulate ‘replicable and scalable experience' in institutional development, and strive to build Shanghai into an international arbitration center with great influence.11 A famous judge from the SPC anticipated that the implementation of the 2014 Pilot Rules would provide beneficial experience for the amendment of Chinese Arbitration Law and the reform and innovation of China's commercial arbitration system.12
Resembling the provisions to be introduced in the Draft Rules discussed above, the 2014 Pilot Rules of SHIAC contains similar provisions allowing for a broader interpretation of written arbitration agreement, consolidation of arbitrations, truncated tribunal and facilitative measures for conducting arbitration proceedings. Moreover, in the following regimes the 2014 Pilot Rules made bold improvements that can be found nowhere in China's other arbitration rules:
Open panel of arbitrators
SHIAC has an established panel of arbitrators composed of 625 arbitrators, 199 of them from 37 foreign countries and regions. Unlike the approach of ‘closed pool' panellists adopted by most Chinese arbitration institutes, the 2014 Pilot Rules took one step towards allowing parties to choose arbitrators from outside the established panel, subject to final confirmation by the commission to guarantee the quality of the selected arbitrators. This liberal approach towards the parties' selection of arbitrators serves to enhance the parties' autonomy over the arbitration process and will certainly encourage the involvement of more sophisticated international arbitration practitioners in China.
Interim measures and emergency tribunal
Under China's current Arbitration Law, the power to issue interim measures for the preservation of property or evidence rests solely with the competent People's Court.13 The arbitration commissions or tribunals can only transfer the requesting party's application for interim measures to the competent court. In contrast, in recent years the arbitral tribunal tends to order interim measures, particularly in case of emergency.
The 2014 Pilot Rules, however, provides detailed guidance by devoting an entire chapter to the interim measures, including an order permitting one party to perform or an injunction preventing one party from performing certain acts. Article 20 of the 2014 Pilot Rules allows SHIAC to transfer the application for interim measures - in accordance with the relevant laws of the jurisdiction where the interim measure is sought together with these Rules - to the court with competent jurisdiction for a ruling, to the tribunal for a decision, or to the emergency tribunal constituted pursuant to article 21 of these Rules for a decision.
An emergency tribunal may be set up by SHIAC in accordance with the laws of the jurisdiction where the interim measure is sought at the request of one party during the period between the acceptance of a case and the constitution of the arbitral tribunal. The emergency tribunal shall make a ruling on the application for interim measures within 20 days after the formation of the tribunal or within 10 days after security is provided by the applicant. The emergency tribunal shall dissolve on the date when the arbitral tribunal is constituted and shall hand over all materials to the tribunal. Unless otherwise agreed to by the parties, the arbitrator appointed for the emergency tribunal shall not act as an arbitrator in respect of disputes relating to interim measures.14
The 2014 Pilot Rules has essentially increased the number of competent bodies that may facilitate the arbitration by issuing interim measures. This includes not only the competent court, but also the emergency tribunal and arbitral tribunal. The 2014 Pilot Rules will be very helpful in territories where the applicable law permits an emergency tribunal or arbitral tribunal to order interim measures. Though the improvement is welcomed, one should not overestimate its application in China because the function of an emergency tribunal or arbitral tribunal in ordering interim measures is not currently allowed under China's Arbitration Law.
Joinder of third parties
For the first time, the 2014 Pilot Rules have opened the door to third parties who wish to join an arbitration.Article 38 of the Rules provides that the claimant and the respondent may by a joint written application request a third party to be joined in an arbitration with the latter's consent. A third party may also apply in writing to become a party in an arbitration with the written consent of both parties. The tribunal shall decide on the joinder of a third party, or, if the tribunal has not been constituted, the Secretariat shall make such decision. The clarification of the rules on the joinder of third parties will improve the efficiency of arbitration proceedings and help to avoid potential parallel or repetitive proceedings.
There is a long-standing practice in Chinese arbitration of combining arbitration with mediation (Med-Arb). The typical method of Med-Arb is to conduct mediation by arbitrators who switch roles from mediators to arbitrators and vice versa during the same arbitration proceedings with consent from the parties. The practice has proved effective in resolving disputes quickly and cheaply, yet an increasing concern has been raised with respect to due process and without prejudice issues because the arbitrator may, by way of his role as a mediator, be privy to information that would not otherwise be available to him as an arbitrator. For instance, in Gao Haiyan and Xie Heping v Keeneye Holdings Ltd, the Hong Kong Courts have warned against the potential shortcomings of Med-Arb.15
To avoid possible challenges to Med-Arb cases, the 2014 Pilot Rules provides parties with one alternative option - they may have a mediation conducted by a mediator who shall not be an arbitrator in the same dispute, parallel to the arbitration proceedings. Article 50 of the Rules stipulates that any party may apply for mediation with the consent of the other party during the period after an arbitration case has been accepted and before the tribunal is constituted. The chairman of the SHIAC shall, within three days after receipt of written consent for mediation, appoint a mediator from the panel of mediators. Mediators are bound by ethical rules and mediation shall not affect the arbitration proceedings. Unless otherwise agreed to by the parties in writing, a mediator shall not act as an arbitrator in the subsequent arbitration proceedings. It is anticipated that this new mechanism will be able to serve the parties well by relieving their doubt as to the possible bias or injustice that may be arise from the traditional Med-Arb process.
Award ex aequo et bono
The 2014 Pilot Rules allow arbitrators to decide the case ex aequo et bono (ie, in accordance with equitable principles and common good) and not be bound by legal rules. The preconditions to decide ex aequo et bono are that the parties have expressly empowered the arbitrators to do so either in the arbitration agreement or in a written application submitted during the arbitration proceedings, and that such decision would not violate any mandatory provisions of laws or public policies.
Authorised with the power to decide the case ex aequo et bono, the arbitral tribunal may have one more practical tool to reach a fair decision in light of the circumstances of the case.
Strong judicial support to the 2014 Pilot Rules
Immediately after the promulgation of the 2014 Pilot Rules by SHIAC, the Shanghai No. 2 Intermediate People's Court, the court designated by the higher court to be in charge of reviewing arbitration cases by SHIAC, issued ‘Opinions on Judicial Review and Enforcement of Arbitration Cases Applying the China (Shanghai) Pilot Free Trade Zone Arbitration Rules' (the Opinions)16 on 4 May 2014.The Opinions provide strong judicial support for the implementation of the 2014 Pilot Rules.
The Opinions have 20 articles altogether.The main aim of the Opinions is to positively and efficiently support arbitration under the 2014 Pilot Rules, being applicable to all types of cases including applications for property preservation, confirming the validity and effect of arbitration agreement, and enforcing, revoking, and setting aside awards. Among others, the Opinion shows respect for party autonomy, places no restriction on the scope of application of the Rules, recognises the appointment of non-penal arbitrators and awards ex aequo et bono, and establishes a fast-track mechanism for confirming arbitration agreement and enforcement of arbitral awards.The Opinions will greatly facilitate and guarantee the implementation of the 2014 Pilot Rules, and provide parties to arbitration under the 2014 Pilot Rules with tremendous convenience.
The pre-reporting mechanism specially tailored for the split of CIETAC
Those who are familiar with arbitration in China will likely know that there is a special ‘pre-reporting mechanism' set up and maintained by the SPC to combat local protectionism in the setting aside and enforcement of arbitral awards. The core concept of the ‘pre-reporting mechanism' is to require that local courts report level by level to the SPC if the local courts intend to deny the validity of an arbitration agreement involving foreign elements, refuse the recognition and enforcement of a foreign-related arbitral award; or set aside a foreign-related arbitral award. Only having received a reply from the SPC may the competent local courts render judgment on the issues in dispute.17 This centralised monitoring mechanism has effectively curbed the motivation for local protectionism and greatly reduced the possibility of conflicting judicial decisions on the same or similar issues.
In September 2013, the SPC decided to employ the ‘pre-reporting mechanism' to resolve the problems arising from the split of CIETAC.
Conflicting judicial decisions after the split of CIETAC
The split of the CIETAC Shanghai Sub-Commission and the CIETAC South China Sub-Commission was triggered by the promulgation and implementation of the 2012 CIETAC Rules, which became effective as of 1 May 2012. Along with the back-and-forth argument with CIETAC Beijing, SHIAC and the SCIA have increased their pace to finalise their independent status by obtaining official support from the local legislative, administrative and judicial authorities.
The movement in affirming the SCIA and SHIAC's status after the split from CIETAC Beijing has steadily proceeded, and it seems that the separation is inevitable and irrevocable. Currently, there is no doubt that the former CIETAC Shanghai Sub-Commission and the former CIETAC South China Sub-Commissions have separated from CIETAC Beijing and that they are now independent arbitration commissions, recognised at least by local authorities. CIETAC is thus split into three independent arbitration commissions:
- CIETAC, with headquarters in Beijing, three remaining Sub-Commissions in Tianjin, Chongqing and Hong Kong, and two offices in Shanghai and Shenzhen respectively;
- SHIAC, with headquarters in Shanghai and a branch called the China (Shanghai) Pilot Free Trade Zone Court of Arbitration in Shanghai; and
- SCIA, with headquarters in Shenzhen.
At the moment, CIETAC accepts all arbitration cases if the parties reach arbitration agreements specifying arbitration by CIETAC or by one of CIETAC's Sub-Commissions (including the Shanghai or Shenzhen Sub-Commission), no matter when the arbitration agreements are concluded, prior to or after the split of CIETAC.
SHIAC and SCIA, however, insist that they are successors of the CIETAC Shanghai and Shenzhen (South China) Sub-Commission respectively. They continue to accept arbitration cases if the arbitration agreements provide for arbitration by CIETAC Shanghai or Shenzhen (South China) Sub-Commission.
Unsurprisingly, the split of CIETAC has created much uncertainty as to CIETAC arbitration agreements and arbitral awards. Practitioners have regularly advised clients to amend the previously drafted CIETAC arbitration agreements to pinpoint which one of the three arbitration commissions should have jurisdiction over their disputes after split of CIETAC, but it is not realistic for the arbitration users to revise all the arbitration agreements, since the disputing parties do not usually agree with each other.
Because of the confused propaganda and clash of jurisdictions, a number of intermediate court judgments took inconsistent approaches towards the validity of arbitration agreements and the enforceability of awards involving the split of CIETAC.18
In south China, where the SCIA is currently located, the Shenzhen Intermediate People's Court delivered two landmark judgments in November 2012 confirming that the SCIA is an independent arbitration commission which, as successor to the CIETAC Shenzhen Sub-Commission (or the CIETAC South China Sub-Commission), may administer arbitration according to the 2005 CIETAC Rules, and an application for setting aside of SCIA arbitral award due to the split of CIETAC was therefore rejected.19
In the Shanghai, Zhejiang and Jiangsu area, where SHIAC is currently located, several intermediate people's courts had delivered conflicting judicial decisions.
On 7 May 2013, the Suzhou Intermediate People's Court of Jiangsu Province handed down a ruling ( Su Zhong Shang Zhong Shen Zi No.004)20 not to enforce an award rendered by SHIAC ( Zhong Guo Mao Zhong Hu Zi No. 452). In the ruling, the Suzhou Intermediate People's Court held that, as SHIAC did not properly inform the parties of the change of the status of the institution and did not give the parties an opportunity to either confirm or reselect the arbitration institution, and that SHIAC had acted against the parties' true intention regarding the selection of the arbitration institution. The Suzhou Intermediate People's Court held that it should not enforce the award as SHIAC had no right to continue to hear and subsequently rule on the case after its 'independence' from CIETAC.
On 22 May 2013, the Ningbo Intermediate People's Court of Zhejiang Province made a similar ruling ( Zhe Yong Zhi Cai Zi No. 1)21 not to enforce an award rendered by SHIAC ( Hu Mao Zhong Cai Zi No. 047).The reasoning of the court was exactly the same as that of the Suzhou Intermediate People's Court.
On 21 July 2013, thet Taizhou Intermediate People's Court of Zhejiang Province made a ruling ( Zhe Tai Zhi Cai Zi No. 2)22 rejecting the respondent's motion for refusal of the enforcement of an award made by SHIAC where the arbitration clause provided that 'disputes shall be submitted to Shanghai branch of CIETAC for arbitration in accordance with law'. The Taizhou Intermediate People's Court dismissed the respondent's arguments and upheld the award on the basis that:
- SHIAC was indeed the arbitration institution 'CIETAC Shanghai branch' stipulated in the arbitration clause of the sales contract;
- the award was made in the name of 'CIETAC Shanghai branch' and SHIAC did not go beyond its authority; and
- the respondent did not raise any objection to the jurisdiction of SHIAC during the arbitration.23
It is worth noting that the attitude towards the SHIAC arbitration taken by the Taizhou Intermediate People's Court is inconsistent with that taken by the Suzhou and Ningbo Intermediate People's Courts.The former was for SHIAC arbitration and the latter was against SHIAC arbitration if SHIAC accepted a case according to a pre-split arbitration clause.
However, the shift took place swiftly because of intervention from the High People's Courts in Zhejiang Province and Jiangsu Province. The High People's Court of Zhejiang Province held in the supervision proceedings that the Ningbo Intermediate People's Court erred in its application of law, and made a directive on 17 July 2013 ordering the Ningbo Intermediate People's Court to rectify the previous decision. On 25 July 2013, the Ningbo Intermediate People's Court made a new ruling ( Zhe Yong Zhi Jian Zi No. 1) revoking the previous ruling and ordered the enforcement of the arbitral award rendered by SHIAC. Subsequently, the High People's Court of Jiangsu Province issued a notice ( Su Zhi Jian Zi No. 71) during the case filing supervision proceedings directing the Suzhou Intermediate People's Court to revoke its previous ruling and to re-review the case.24
The overruling of the court rulings made by the Suzhou and Ningbo Intermediate People's Courts has ensured that the movement of local courts in the Shanghai, Zhejiang and Jiangsu area is consistent in supporting SHIAC's jurisdiction over arbitration clauses concluded prior to the split of CIETAC.
Yet people still have good reason to worry that the jurisdictional dispute among the CIETAC institutions would affect the enforceability of their arbitral awards in other provinces, municipalities and autonomous regions.25The people's courts outside the Shanghai, Zhejiang and Jiangsu area may have some other reasons not to support SHIAC's jurisdiction over pre-split arbitration clauses, as demonstrated by a case adjudicated in the Liaoning Province of north China. In this case, the arbitration clause specified that arbitration should be conducted by the CIETAC Shanghai Sub-Commission. However, the dispute was brought before the Dalian Maritime Court for litigation. The defendant challenged the court's jurisdiction based on the existing arbitration clause. Among other things, the plaintiff argued that since CIETAC has suspended the Shanghai Sub-commission's authorisation to accept or to administer CIETAC arbitrations, the arbitration clause in question had become void. The Dalian Maritime Court and the appellate court, the Liaoning High People's Court, ruled against the plaintiff and held that the arbitration agreement should be valid but the arbitral jurisdiction should be exercised by CIETAC Beijing instead of SHIAC, since CIETAC issued the Management Notice on 1 August 2012, in which CIETAC suspended the Shanghai Sub-commission's authorisation to accept CIETAC arbitration applications. The Dalian Maritime Court ruled that the dispute should be referred to CIETAC Beijing for arbitration and the Liaoning High People's Court upheld the judgment.26
Given the fact that the local courts had differed on the post-split SHIAC's or SCIA's jurisdiction under a pre-split CIETAC Sub-Commission arbitration agreement, and to avoid further diversity in adjudicating the same or similar issues, the SPC decided to set up and implement the 'pre-reporting mechanism' specifically tailored for the split of CIETAC.
The pre-reporting mechanism
On 4 September 2013, the Supreme People's Court (the SPC) issued the Notice on Certain Issues in Relation to the Correct Handling of Judicial Review of Arbitration Matters (the SPC Notice).
The SPC recognised the increase in disputes over the jurisdiction of CIETAC and its former sub-commissions in the acceptance of arbitration cases. It was against this background that the SPC issued the SPC Notice, offering guidance to the lower courts and providing a unified standard on how to deal with these matters. When asked to review the validity of a CIETAC arbitration agreement, or to hear an application to set aside or not to enforce an arbitral award made by CIETAC, SHIAC or SCIA, the SPC Notice requires the relevant court to report its intended decision to the SPC. Such report shall be made level by level and eventually to the SPC, after the lower court's judicial committee has discussed the case and given its opinion. The courts should not make any rulings until the SPC has given its opinion. This level-by-level reporting system is also called a 'pre-reporting mechanism'.
Commentators pointed out that it is a welcome development for China's highest court to take measures to resolve the potential problems caused by the separation of CIETAC,27and that the benefits of the pre-reporting mechanism are manifold. First, it will effectively set up a uniform standard nationwide for judicial review for all courts, and safeguard the predictability of arbitration cases and to the legitimate expectation of the parties. Second, it will prevent local protectionism. Third, it will to a large extend make up for the lack of judicial remedy available to the parties, maintain the authority and stability of arbitration and protect the legitimate rights of bona fide parties.28
The disadvantages of the SPC Notice are equally apparent. It is brief and lacks detailed guidelines on all specified questions and issues, including the legal status of the post-split SHIAC and the SCIA, the allocation of jurisdiction between CIETAC Beijing and SHIAC/SCIA prior to or after the split, and the time frame for the lower court's decision to reach the SPC and for the SPC to issue its opinion. It appears that operation of the pre-reporting mechanism lacks adequate transparency to the public. It is not known at this stage whether the SPC will issue further guidance on these points. No case employing the pre-reporting mechanism has been publicised yet. The effect of the implementation of the SPC Notice, which is bound to draw a lot of public attention, is yet to be seen.
The validity of a hybrid arbitration clause
In most cases, parties agree that an arbitration institution should administer arbitration cases under their own arbitration rules. Occasionally, a hybrid arbitration clause may provide that an arbitration institution should administer arbitral proceedings in accordance with other rules. Paragraph 3 of article 4 of the 2012 CIETAC Rules allows hybrid arbitration by stipulating that:
[where] the parties agree to refer their dispute to CIETAC for arbitration but have agreed on a modification of these Rules or have agreed on the application of other arbitration rules, the parties' agreement shall prevail unless such agreement is inoperative or in conflict with a mandatory provision of the law as it applies to the arbitration proceedings. Where the parties have agreed on the application of other arbitration rules, CIETAC shall perform the relevant administrative duties.
In practice, this provision is rarely applied.
A recent case, however, signals that the Chinese courts are willing to confirm that a hybrid arbitration clause is valid and enforceable. Following directions from the Supreme People's Court, the Ningbo Intermediate People's Court gave a ruling on 27 March 2014 holding that CIETAC may administer arbitration proceedings under the UNCITRAL Rules and that the parties' agreement should be recognized and upheld.29 In that case, Luxembourg company INVISTA Technologies Sàrl (INVISTA)and Chinese company Zhejiang Yisheng Pretrochemical Co Ltd (Yisheng) agreed in a licence agreement that 'arbitration shall take place at CIETAC' in accordance with UNCITRAL Rules. INVISTA initiated the arbitration before CIETAC and Yisheng challenged the validity of the hybrid arbitration clause before the Ningbo Intermediate People's Court by alleging that the parties had only agreed the place of arbitration but failed to designate an arbitration institution and therefore the hybrid arbitration clause was essentially an ad hoc arbitration clause which was invalid for being in violation of the Chinese Arbitration Law. In the ruling, the Ningbo Intermediate People's Court held that the words 'arbitration shall take place at CIETAC' should be interpreted as the parties' agreement to have CIETAC administer arbitration under the UNCITRAL Rules. The agreement is valid and enforceable, and Yisheng's application should be dismissed.
The ruling given by the Ningbo Intermediate People's Court should receive warm welcome since it opens the door to a more liberalised arbitration environment in Mainland China. It also reflects Chinese Courts' increasing support for CIETAC's internationalisation.
Investment treaties and free trade agreements
China has concluded over 130 BITs and FTAs over the years. Such treaties typically grant foreign investors the right to initiate arbitration for violations of the guaranteed substantive treatments under the BIT by the host state.30
In the past year, one important development is the implementation of the China-Japan-Korea trilateral investment treaty.
The China-Japan-Korea Agreement for the Promotion, Facilitation and Protection of Investment is widely believed by economists to be a prelude to the foundation of the free trade agreement (FTA) among the three countries. On 13 May 2012, China, Japan and Korea concluded this trilateral investment agreement which forms the first legal framework among China, Japan and Korea in the regime of economic cooperation. It came into effect on 17 May 2014.
The three nations have previously concluded several bilateral investment treaties, including a 1988 treaty between China and Japan and a 1992 treaty between China and Korea. However, the rights granted in those agreements were more circumscribed. For example, investors can only submit claims to international arbitration in the case of expropriation and only have a claim for quantification of compensation owed under national law (as opposed to international law). Article 15 of the trilateral investment agreement extends the coverage of arbitration to almost all legal obligations. Paragraph 1 of article 15 provides that:
an investment dispute is a dispute between a Contracting Party and an investor of another Contracting Party that has incurred loss or damage by reason of, or arising out of, an alleged breach of any obligation of the former Contracting Party under this Agreement with respect to the investor or its investments in the territory of the former Contracting Party.
For the settlement of investment disputes between a contracting party and an investor of another contracting party, article 15 provides a number of options, including investor-state arbitration in accordance with the ICSID Convention, the ICSID Additional Facility Rules and the UNCITRAL Rules. Parties are also free to agree on arbitration in accordance with other arbitration rules.
For the settlement of disputes between contracting parties to the trilateral agreement through arbitration envisaged by article 17, the default mechanism is ad hoc arbitration under the UNCITRAL Rules of Arbitration unless the contracting parties have agreed otherwise. These rules may be modified by the disputing parties or modified by the arbitrators. Interestingly, article 17 allows the third contracting party to participate in the arbitration proceedings by joining either of the disputing parties by delivering a written notice of its intention to participate to the disputing parties and to the arbitral tribunal. Alternatively, article 17 allows the third contracting party that is not participating in the arbitration proceedings to attend all hearings, to make written and oral submissions to the arbitral tribunal and to receive a copy of the written submissions furnished by the disputing parties to the arbitral tribunal.
This agreement has thus deepened the contracting parties' commitments to international arbitration as a means of resolving disputes with foreign investors or among themselves.
This past year witnessed much chaos over the split of CIETAC. With the intervention by the SPC and with joint efforts made by local courts, especially through the newly-established pre-reporting mechanism, the uncertainty and risks over the jurisdictional issues, the enforceability of arbitral awards and so on have been significantly reduced. It is believed that the new level-by-level reporting system will effectively minimise the inconsistent practices by local courts, and will gradually clarify the jurisdictional allocation of CIETAC, SHIAC and SCIA in applying the pre-split or after-split arbitration clauses.
More encouragingly, China's arbitration institutions are moving forward to focus on strategic expansion and the improvement of service quality. As quick learners of the generally accepted international standards of the arbitration community, some of them are striving for superiority. Good examples of this are the Shanghai International Economic and Trade Arbitration Commission and the BAC. By promulgating new Rules of Arbitration or soliciting opinions for the amendments of existing Rules, they are making innovative improvements and breakthroughs. In a country like China with a large number of arbitration institutions, a high quality of service should always be the primary goal to be achieved year by year.
The authors would like to thank Ellen Pang for her assistance in this chapter.
- Legal Daily, 'The Number of Cases Accepted by Arbitration Institutions Nationwide has increased Continuously for 17 Years', www.legaldaily.com.cn/index/content/2013-04/23/content_4398786.htm?node=20908.
- 'The Caseload of Yearly Accepted Arbitration Cases Broke Through 100,000 the First Time in the History', Legal Daily, www.legaldaily.com.cn/index/content/2014-06/06/content_5579303.htm
- Supra notes 1 and 2.
- CIETAC, 'The 2013 APRAG Conference Successfully Convened in Beijing', www.cietac.org/index.cms.
- CIETAC, 'CIETAC Has Great Potential in Foreign-Related Commercial Arbitration', www.cietac.org/index.cms.
- On 31 December 2012, CIETAC made an announcement that it had terminated authorisation previously conferred upon SCIA and SHIAC and forbid them from accepting or administrating arbitration cases. SCIA and SHIAC rejected the announcement.
- Beijing Arbitration Commission, Annual Report 2013, www.bjac.org.cn.
- Wuhan Arbitration Commission, www.whac.org.cn.
- Beijing Arbitration Commission, The New BAC Arbitration Rules Draft Published for Comments, www.bjac.org.cn/en/news/view.asp?id=2361.
- Jingzhou Tao and Mariana Zhong, 'A digest of the China (Shanghai) Pilot Free Trade Zone Arbitration Rules: a more liberal development of arbitration practice in PRC', www.dechert.com.
- SHIAC, 'The First Free Trade Zone Arbitration Rules in PRC made by SHIAC Coming into Force', www.shiac.org/English/NewsDetails.aspx?tid=7&nid=630.
- Articles 28, 46 and 68 of the Arbitration Law of the PRC provide that the arbitration commission should forward the parties' request for preservative measures (of property or evidence) to the competent People's Court for handling.
- Article 21 of the 2014 Pilot Rules of SHIAC.
- In 2011, the Hong Kong Court of First Instance refused the enforcement of an arbitral award made by Xian Arbitration Commission in Mainland China on the basis that the mediation carried out during the arbitration by one of the arbitrators was tainted by the appearance of bias (Reyes J in Gao Haiyan and Xie Heping v Keeneye Holdings Ltd  3 HKC 157, 12 April 2011). The decision of the Court of First Instance was overturned by the Court of Appeal (CACV No. 79 of 2011: 2 December 2011).
- For full text of the Opinion issued by the Shanghai No. 2 Intermediate People's Court, visit www.cietac-sh.org/NewsDetails.aspx?tid=7&nid=655.
- The Supreme People's Court Notice on People's Court Handling Issues Concerning Foreign Related Arbitration and Foreign Arbitration (28 August 1995) and the Supreme People's Court Notice on Matters Concerning People's Court's Setting Aside Foreign-related Arbitral Awards (23 April 1998).
- For a detailed account on the conflicting judicial decision, see Justin D'Agostino, 'The Aftermath of the CIETAC Split: Two years on, lower courts take clashing views on arbitration agreements and awards - but higher courts strive for consistency', at http://kluwerarbitrationblog.com/blog/2014.
- Case No. 225/2012  Shen Zhong Fa She Wai Zhong Zi No. 225) and Case No. 226/2012  Shen Zhong Fa She Wai Zhong Zi No. 226), www.sccietac.org/. Also, John Choong, The GAR Asia-Pacific Arbitration Review 2014.
- The applicant for enforcement was Jiangxi LDK Solar Hi-tech Co, Ltd and the respondent resisting enforcement was Suzhou CSI Solar Power Technology Co, Ltd, a Suzhou-based joint venture.
- The applicant for enforcement was Jiangxi LDK Solar Hi-tech Co, Ltd and the respondent resisting enforcement was Risen Energy Co, Ltd, a Zhejiang company.
- The applicant for enforcement was Jiangxi LDK Solar Hi-tech Co, Ltd and the respondent resisting enforcement was Jinnuo New Energy Co, Ltd, a Zhejiang company.
- For the text of court ruling, see SHIAC website www.cietac-sh.org/NewsDetails.aspx?tid=7&nid=555.
- For the text of court rulings, see SHIAC website www.cietac-sh.org/NewsDetails.aspx?tid=7&nid=556. Also, Jun He Bulletin, 'An update on CIETAC jurisdictional dispute' (November 13, 2013).
- Ibid, Jun He Bulletin.
- The ruling ( Da Hai Shang Wai Chu No. 8) made by Dalian Maritime Court on October 30, 2012 and the ruling (Liao Min San Zhong No. 15) made by Liaoning High People's Court on 27 June 2013. See full text of the two rulings at CIETAC website www.cietac.org.cn/NewsFiles/NewsDetail.asp?NewsID=1237.
- Supra, note 18, Justin D'Agostino.
- Supra, note 24, Jun He Bulletin.
- Richard Woolley, 'Chinese Court Allows Hybrid Arbitration', GAR 13 June 2014, See https://globalarbitrationreview.com/news/article/32720/
- Supra, note 19, John Choong.