For international contracts arbitration is now in China the predominant mechanism of dispute resolution. It is, however, a fact that foreign firms prefer to take disputes involving a Chinese partner to an arbitral location outside Mainland China. There is no doubt that such a choice is valid according to Article 128 of the Law on Contracts of 1999, on condition that the dispute is “foreign-related”. Is there a specific reason explaining this preference for a foreign arbitral seat?
For international contracts arbitration is now in China the predominant mechanism of dispute resolution. It is, however, a fact that foreign firms prefer to take disputes involving a Chinese partner to an arbitral location outside Mainland China. There is no doubt that such a choice is valid according to Article 128 of the Law on Contracts of 1999, on condition that the dispute is “foreign-related”.[1] Is there a specific reason explaining this preference for a foreign arbitral seat?
Since the PRC joined the WTO in 2001 it made a lot of efforts to create a solid frame for foreign investments and for international arbitration. China has nowadays adopted the greater part of the essential principles of the transnational arbitration practice, however with its own particular characteristics, a survey of which follows bellow. The question which I seek to answer is, could these characteristics provide the reason justifying the preference for a foreign arbitral seat?
Typical for arbitration in China is the combination of mediation and arbitration.
Mediation (“tiaojie”) was the traditional way of resolving conflicts in China, advocated by Confucius. It still is. The People’s Mediation Law of 2010 established more than 80.000 Mediation committees in Mainland China, amongst them for instance the Shanghai Commercial Mediation Centre.
Arbitration (“gongduan”) is another and different way of resolving conflicts outside the People’s Courts. It was introduced in China in the 1950’s, following in the Soviet Union’s footsteps in a centrally planned economy. The pace for developing arbitration as an alternative dispute resolution mechanism was set by the Law on Arbitration of 1995, according to which all existing arbitration commissions attached to some administrative department were reformed in 202 independent arbitral institutions, such as BAC, the Beijing Arbitral Commission.[2]
International arbitration is regulated by the CIETAC (China International Economic and Trade Arbitration Commission) and for maritime disputes, the CMAC. The CIETAC revises its rules constantly to take into account criticisms received from practitioners. The most recent review took place in 2015. The competence of the CIETAC is widely recognized, in China and abroad.
Chinese arbitrators systematically ask the parties if they desire the help of the arbitral tribunal in order to reach an amiable solution. The arbitrators may also meet the parties separately, if both of them agree to doing so. If this type of mediation doesn’t succeed, they will simply continue as arbitrators, and render an arbitral award.
An arbitral award according to equity and reasonability is also typical of Chinese arbitration. In the West, the arbitral tribunal shall decide the dispute “ex æquo et bono” (as “amiable compositeur”) only if so instructed by the parties. Chinese arbitrators on the contrary rely heavily on equitable principles without needing specific instructions from the parties to do so.[3]
“Ad hoc” arbitration, meaning that which does not fall under the umbrella of an arbitral institution, is not recognized in Chinese law. On pain of invalidity the arbitral clause must designate an arbitral institution. In case of ambiguity, the People’s Courts take often a very restrictive view of the clause. It is important to know this because the most frequently invoked ground against the recognition of an arbitral award is indeed an invalid arbitral clause.
The institutions play a fundamental role in China. There is a high degree of “control” over arbitration. The institutional control in opposition to party autonomy goes against the transnational idea that the parties are in control, and that the institution only serves to facilitate the arbitration. In China, from the beginning to the end of the arbitral procedure, the institution gets involved in the working of the tribunal. It is, for example, the institution which at the start of the procedure decides if the arbitral clause is valid, - not the tribunal. The institution will also decide on the language of the procedure if the parties do not agree on this matter and, if the parties do not agree on the appointment of a chairman of the arbitral tribunal, the institution will make this decision as well. This is problematic, because in that case a Chinese arbitrator will always be appointed as chairman, with the result that two of the three arbitrators will be Chinese.
The institutions also makes decisions about interim measures, concerning, for instance, safeguarding the evidence or the protection of property against dispossession. It is up to the institution to request a People’s Court to order such a measure, the arbitral tribunal not having this prerogative.
Concerning the arbitral awards rendered in Mainland China, the Chinese law distinguishes between the purely domestic awards and the foreign-related awards. A dispute is foreign-related if one of the parties is foreign or resides habitually outside of China; if the subject matter of the dispute is located outside China; or if the legal facts that led to the establishment, change or termination of the transaction occurred outside of China. The rules of procedure are different for each of these two types of arbitration. It is, for example, only in an enforcement procedure of purely domestic awards that a People’s Court can review the merits of the dispute, for instance unsatisfactory evidence. Such a rejudging of the merits of the case cannot be done in a procedure involving a foreign-related award. One should keep in mind that a dispute between joint-ventures, even a wholly foreign-owned enterprise that is registered in the PRC, has to be qualified as purely domestic.[4]
For the enforcement in Mainland China of a foreign award the fundamental Convention of New York of 1958, ratified by the PRC in 1986, is scrupulously applied by the People’s Courts.[5] Hong Kong is considered by Chinese law to be an offshore location. The New York Convention doesn’t apply, however, but instead the very similar Arrangement concluded between Mainland China and the Autonomous Administrative Region about the reciprocal enforcement of their arbitral awards.
For the recognition and enforcement procedure of domestic awards - purely domestic as well as foreign-related - the Chinese law applies a dual system. To oppose the enforcement of an award rendered in Mainland China by the winning party, the loser has two possibilities. He can, within 6 months from the award on, request the People’s Court of the city where the seat of the arbitral institution is located, to annul the award. Alternatively, he can simply wait until the winner tries to enforce the award before another People’s Court, and then oppose the enforcement in this procedure. This dual system gives, in practice, the losing party a possibility to delay the procedure.
A big problem which the winning party might face in enforcing the award in the PRC is the protection offered to the local respondent by some People’s Courts. To remedy this, the Supreme People’s Court decided that no Court can refuse the enforcement of a foreign or of a foreign-related award without obtaining prior confirmation of the refusal from a higher Court, including, where necessary, the Supreme People’s Court itself. This procedure does lead to delay but it also illustrates the arbitration-friendly attitude of the Supreme People’s Court.
Public policy can be invoked to refuse recognition of an arbitral award. However, the Chinese legislator uses another concept than public policy as ground for refusal to recognize a purely domestic or a foreign-related award, namely social and public interest (“shehui gonggong liyi”), which is a much broader concept.
Against the recognition of a foreign award, according to the New York Convention of 1958, only the international public policy can be invoked. The Supreme People’s Court adequately interpreted this concept narrowly. But in the Hemofarm case of 2008 it refused for the first time recognition of an ICC award because it was contrary to the Chinese judicial sovereignty. The reason for doing so was that the ICC Court had not followed an earlier decision of a People’s Court which in a case between the same parties had deemed the arbitral clause invalid.
This text has thus far summarised the differences between the Chines and transnational aribitration practices - e.g. the appeal to mediation , the reliance on equitable principles , the numerous exceptions to the principle of the autonomy of the parties , the necessary intervention of a People's Court for interim measures .
Could the reason for the choice of a foreign seat of arbitration be found in the Chinese legislation? In order to find a clear answer, a scientific qualitative and quantitative field survey should be carried out, by means of a questionnaire addressed to the Chambers of Commerce and to the parties involved in published cases. The results of the enquiry could possibly indicate the need of adjustments in the Chinese legislation, if a change would seem desirable. In 2018 the "China International Commercial Court" was launched in Xi'an to provide effective judicial protection in the context of the "One Belt, One Road initiative" . Will the new possibility to submit a dispute to that ( Arbitral ) Court dissuade contractual parties to opt for arbitration with a seat outside Mainland China? Probably not. Indeed, no foreigner can be member of its bench, the new Court being a branch of the Supreme People’s Court. Foreign specialists can only be member of the advisory expert committee. The procedure moreover is in Mandarin Chinese and the translation of the legal paperwork is burdensome. If the legislator wishes to rectify the situation, scientific research may help to find out where there is space for improvement. Logically the own characteristics of the arbitration law, being different from the transnational principles, must hold somewhere the answer.
[1] Under the same condition of a “foreign element” the parties may determine the law applicable to the merits of the dispute (Art. 41, Law on Private International Law; Art.126, Law on Contracts). See Herbots, J. H., “Contracts of the People’s Republic of China. An outline of the Chinese law from the perspective of Europe and Hong Kong”, Die Keure, Bruges, 2018, p. 113 and 119.
[2] The Law on Procedure of 1991 used the term “institution”, while the Law on Arbitration uses the older term “commission”.
[3] Fan, Kun, “Arbitration in China. A legal and culture analysis” , Hart Publishing, 2013, p. 206.
[4] Tao, J., “Arbitration Law and Practice in China”, Kluwer Law International, 2012, third ed., p.112; Fan, Kun ,o.c., p.28.
[5] There is much discussion about awards rendered in China by a foreign arbitral institution, like e.g. the ICC Court. Most Courts will accept the validity of the award, but will qualify it as domestic. The Intermediate Court of Ningbo was right to qualify it in 2009 in the Duferco case as a foreign award, so that the New York Convention applies.