Relevant characteristics of arbitration in China

Chinese arbitration law and practice in some ways vary from what is commonly understood as characteristics of international commercial arbitration. Below, the most important issues are highlighted. In addition, the special role of the Shanghai Free Trade Zone (“FTZ”) in China arbitration is introduced.

2.3.1. Institutional character of arbitration

As mentioned, in principle, only institutional arbitration is allowed in China and ad hoc arbitration cannot be conducted within its borders. According to Art. 16 and 18 of the CAL, an arbitration agreement without designating an arbitration institution should be deemed invalid. The subsequent sources of law, such as the above introduced SPC 2006 Interpretation helped (particularly the state courts) to understand and interpret this requirement in a more arbitration-friendly way. Nevertheless, still, there must be a clear indication of an arbitration institution in order to have a valid agreement

143 See more Chapter 5 p. 117-118.

144 China International Economic and Trade Arbitration Commission (“CIETAC”) Guidelines on Evidence effective from 1 March 2015 [中国国际经济贸易仲裁委员会 证据指引，从2015年3月1日起施行].

145 The preamble of the CIETAC Guidelines on Evidence.

146 China's Foreign Trade, "Promote Chinese Arbitration Work into an International One - an Interview with Mr.

Wang Shengchang, Secretary General of CIETAC," China's Foreign Trade 《中国对外贸易₍英文版₎》 _February 2004, 2004, http://en.cnki.com.cn/Article_en/CJFDTOTAL-ZDWY200402011.htm. (last accessed: 20 November 2018).

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under the current legal regime. China, however, recognizes and enforces foreign ad hoc arbitral awards, since it is bound to do so by the New York Convention.¹⁴⁷

Interestingly, at the end of 2016, the SPC in its Opinion on the Judicial Safeguards for the Construction of Free Trade Zones (“SPC FTZ Opinion”)¹⁴⁸ made a move that can be seen as a subtle “door opening”

for the ad hoc arbitration in China. This is because Art. 9(3) of the SPC FTZ Opinion provides that the companies registered in the free trade zones (“FTZ”) have a possibility to validly enter into an ad hoc arbitration agreement if such an agreement contains: (1) a specified location in China; (2) a specified set of arbitration rules; and (3) specified arbitrators. There are, however, some limitations and uncertainties surrounding this move. First, the ad hoc possibility is available only in cases, where all of the parties are registered in the FTZ. Furthermore, there is no clear guidance as to, for example, how arbitrators should be designated in the arbitration agreement. Should specific names or a list of potential arbitrators be given, or would any other way of designation suffice? An answer to this question is not fully clear as of today.

2.3.2. Dual-track system

To reiterate, arbitration in China can be divided into: foreign, foreign-related, and domestic arbitration.

Accordingly, “foreign arbitration” is arbitration conducted by a foreign arbitral tribunal and seated outside of China. “Foreign-related arbitration” is arbitration, which involves (a) foreign element(s), but is seated inside China. Such “foreign” elements refer to the following circumstances: (1) where a party concerned or both parties concerned is/are (a) foreign citizen(s), (a) foreign legal person(s) or any other organization, or (a) stateless person(s); (2) where the habitual residence of a party concerned or both parties concerned is located outside the territory of the PRC; (3) where a subject matter is located outside the territory of the PRC; (4) where the legal facts that trigger, change or terminate a civil relation take place outside the territory of the PRC; or (5) any other circumstances that can be determined as foreign-related civil relations.¹⁴⁹ Finally, “domestic arbitration” is arbitration not involving any of the foreign elements listed above and seated inside China.

147 See Yuen, McDonald, and Dong, 127.; see more in Gu, Arbitration in China: Regulation of Arbitration Agreements and Practical Issues, 21-24.

148 Opinion of the Supreme People’s Court on the Judicial Safeguards for the Construction of Free Trade Zones, Fa Fa [2016] no. 34 issued on and effective from 30 December 2016 [最高人民法院关于为自由贸易试验区建 设提供司法保障的意见〔2016〕34号, 颁布时间: 2016年12月30日, 实施时间: 2016年12月30日].

149 Art. 1 of the SPC 2012 Interpretation. The test was further reconfirmed by the Art. 522 of the Interpretations of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China, Fa Shi [2015] No. 5, issued on 30 January 2015, effective from 4 February 2015; [最高人民法院关于适用《中

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This division and the dual-track regime for arbitration seated inside China is important, because domestic and foreign-related arbitration proceedings are treated differently; domestic arbitration is more severely scrutinized than foreign-related arbitration. The most important ramifications of the division are the following: (1) domestic arbitration cannot be seated outside of China and can only be administered by a Chinese arbitration institution; (2) domestic arbitration can only apply Chinese law as a substantive law; and (3) domestic awards are subject to a wider review by the Chinese courts.¹⁵⁰ Therefore, it can be a vital issue whether a particular case involves a “foreign element” or not.

Traditionally, the Chinese courts held the conservative view that a dispute between two foreign-invested enterprises (“FIE”) registered under the Chinese law does not contain a “foreign element”, unless some other foreign factors (as required by law) are involved. Therefore, even in cases where all the parties were wholly foreign-owned enterprises (“WFOE”), and the sources of capital, management and control, as well as the beneficiaries were all foreign – such a dispute still could be deemed a domestic one.¹⁵¹

Importantly, the understanding of a “foreign element” has expanded recently. At the end of 2016, following the case of Shanghai Golden Landmark Co. Ltd v. Siemens International Trade, in which the Chinese court for the first time exercised its discretion to navigate a “foreign element” under “other circumstances” (as prescribed by Art. 1(5) of the SPC’s interpretation from 2012),¹⁵² the SPC issued the

华人民共和国民事诉讼法》的解释, 法释[2015] 5号, 颁布时间: 2015年1月30日，实施时间: 2015年2 月 4日] (“SPC 2015 Interpretation”).

150 See Art. 237 of the CCPL for the additional grounds to deny the enforcement of a domestic arbitral award.

These are the situations where the court finds that: (1) the evidence based on which an award was rendered was falsified; (2) the other party concealed the evidence from an arbitral tribunal, which is sufficient to affect the impartiality of an award; or (3) arbitrators were involved in any of conducts of embezzlement, bribery, practicing favoritism for him or herself or relatives, twisting the law in rendering an award.

See, generally, for a more extensive discussion on the ramifications of the dual track in China in Chen, Predictability of 'Public Policy' in Article V of the New York Convention under Mainland China's Judicial Practice, 176-184. (Note, however, that as explained in Chapter 4 p. 80, the PRS mechanism discussed by Chen applies now to both foreign-related and domestic cases.)

151 For example, in Beijing Chaolaixinsheng Sports and Leisure v. Beijing Suowangzhixin Investment Consulting, the SPC stated that the fact that a WFOE is a party to a dispute does not itself constitute a “foreign” element, and as such, it refused to enforce an award made by the Korean Commercial Arbitration Board in the dispute involving a WFOE owned by a Korean investor. See more Lijun Cao and Leilei Lu, "To Be or Not to Be: The Practical Implications of Choosing Foreign Arbitration for Purely Domestic Contracts," Kluwer Arbitration Blog (6 March 2015), http://kluwerarbitrationblog.com/2015/03/06/to-be-or-not-to-be-the-practical-implications-of-choosing-foreign-arbitration-for-purely-domestic-contracts/. (last accessed: 20 November 2018).

152 In Shanghai Golden Landmark Co. Ltd v. Siemens International Trade, both parties were WFOEs. As per their arbitration agreement, the SIAC-administered tribunal decided the dispute. A losing party objected to the enforcement of an award arguing that the dispute did not contain any “foreign element”. However, the Shanghai court confirmed the validity of the arbitration agreement in this case and enforced the award. The

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above mentioned SPZ FTZ Opinion. It provided that two WFOEs incorporated in the FTZ can resolve their disputes outside of China. In such a case, a Chinese court should not invalidate an arbitration agreement merely on the ground that there is no “foreign element”.¹⁵³

In addition, Art. 9(2) of the SPC FTZ Opinion stipulates that the court should reject the objections against enforcement of an award rendered in arbitration seated outside of China solely on the ground that there is no “foreign element” in cases where: (1) at least one of the parties was a foreign-invested enterprise (“FIE”) registered in the FTZ; (2) the parties entered into an agreement for arbitrating outside of China; and (3) the party objecting to the enforcement is a claimant initiating an arbitration proceeding or a respondent participating in arbitration and not raising the objections toward the validity of the agreement until the enforcement phase. Although this development can be assessed as a positive step toward the further internationalization of the Chinese arbitration system, it needs to be noted that this expansion of the understanding of a “foreign element” is, as of today, limited to the enterprises established in the FTZs and is subjected to the conditions described above.

2.3.3. Special role of the Shanghai Free Trade Zone

According to the description available on the official website of the Shanghai FTZ, “[t]he establishment of Shanghai Free Trade Zone is major decision made by the Central Committee of the Communist Party of China in response to new challenges posed by the new situation. It is envisioned to explore new paths and accumulate good experience for all-round reform and opening-up.”¹⁵⁴

The Shanghai FTZ performs the role of a laboratory for testing various innovations, including legal innovations. The innovations tested with satisfactory results within the limited area of the FTZ, have then the chance to be applied across the country. So far, for arbitration, the Shanghai FTZ has performed its special role when, for example, it witnessed the opening of the first foreign arbitration institutions in China – the HKIAC, the SIAC and the ICC, details of which are discussed in Chapter 8 of this thesis.¹⁵⁵ Also, as discussed above, the SPC issued recently a document (the SPC FTZ Opinion) offering more arbitration options to the FTZ-established enterprises.

court found that although at a prima facie check, the dispute did not contain a “foreign element”, but it should be classified, in fact, as containing such an element, because of the characteristics of the parties (the

companies solely owned and controlled by foreigners, and established in the Shanghai FTZ), and because the performance of the contract involved foreign elements. See more in ibid. (last accessed 20 July 2018).

153 See Art. 9(1) of the SPC FTZ Opinion.

154 See the official website of the Shanghai FTZ: http://en.shftz.gov.cn/about-ftz/introduction/ (last accessed:

20 November 2018).

155 See Chapter 8 p. 187-188.

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