Arbitration in China: A Legal Overview

Author:	Xiaoyang Zhang Lecturer of Business Law, The Open University of Hong Kong
Subjects:	Arbitration agreements commercial (Other articles) China International Economic and Trade Arbitration Commission China law (Other articles)
Issue:	Volume 6, Number 3 (September 1999)
Category:	Current Developments

Contents

• Introduction
• Arbitration Agreements in China
  • Removal of the right to appeal to judicial organisations
  • Severance from underlying contract
  • Limitation of the scope of arbitration
  • International Conventions
• Choosing an arbitral jurisdiction
• The Arbitration Law
• The role of CIETAC
• Conducting Arbitration in China
  • The Commencement of Arbitration
  • Setting up the arbitration tribunal
    • Single person Tribunal
    • Three person Tribunal
    • Qualifications of arbitrator(s)
  • General course of the proceedings
• Arbitration Awards
  • Sovereign immunity
  • Judicial review of an award
  • Enforcing an award
    • Enforcement of domestic awards
    • Enforcement of foreign awards
• Summary
• Notes

Introduction

1. International investors are aware that commercial disputes often arise during the interpretation and implementation of business agreements. Because of the risk of commercial disputes arising, foreign businesses are anxious that any disputes that arise are resolved swiftly and efficiently.

 
2. In response to these concerns, the Chinese Government in 1956 set up an arbitration body whose sole purpose was to settle international commercial disputes. This authority was called the China International Economic and Trade Arbitration Commission (CIETAC). CIETAC was established as the country's principal arbitration institute for resolving disputes between foreign firms and Chinese legal persons.[1]

 
3. However, until 1995 there had been no comprehensive set of arbitration legislation established in China. Conducting arbitration between local Chinese concerns and foreign concerns was done in a piece-meal fashion by borrowing relevant provisions from the different statutes that governed commercial transactions.

 
4. With the implementation of its open-door policy, the Chinese Government came under increasing pressure to rectify the existing arbitration laws. As a result, China's first Arbitration Law ("the Law") was promulgated on 31 October 1994 and came into effect on 1 September 1995[2]. The purpose of the Arbitration Law is to provide a system of arbitration in China that meets both foreign and domestic demands for efficient resolution of disputes.

Arbitration Agreements in China

5. An arbitration agreement is usually interpreted in China as being the desire by parties' to have their disputes resolved in a private tribunal, supervised by CIETAC, rather than by means of a lengthy trial process.

 
6. Generally, the following four conditions will apply for parties who have entered into an arbitration agreement: -

Removal of the right to appeal to judicial organisations

7. In China, disputes arising under an arbitration agreement will only be dealt with through arbitration. In accordance with article 257 of the Civil Procedure Law and article 5 of the Arbitration Law, parties who agree to bring their disputes to arbitration cannot file a lawsuit. Thus, an agreement to settle disputes by arbitration made in China will exclude any recourse to judicial settlement. Similarly, the courts will refuse to hear cases that have had prior arbitration agreements made.

Severance from underlying contract

8. Arbitration agreements are deemed severable from the underlying contract, in accordance with article 19 of the Arbitration Law and article 5 of CIETAC's Arbitration Rules.

 
9. Therefore, whilst the arbitration agreement is subordinate to the contract, the obligations to which it gives rise to will continue to survive, even upon termination or suspension of the main contractual relationship[3]. The rationale for this is that when a contract comes to an end the parties will continue to be bound by their commitment to arbitrate rather than resort to the Courts.

 
10. Similarly, an arbitration agreement will also survive the failure of any condition that is precedent to the operation of the main contract.

Limitation of the scope of arbitration

11. In China, an arbitral institution is not permitted to handle any matter beyond the scope of the arbitration agreement.[4] Thus, any subject matter to be heard at arbitration will be strictly confined to issues that fall within the specific terms of the arbitration agreement.

International Conventions

12. As China is a signatory to two major conventions for the enforcement and recognition of foreign awards the terms of these conventions may apply. The two conventions are the New York Convention of 1958 and the Washington Convention of 1965. China has signed other bilateral and multilateral treaties with various countries for the enforcement of arbitral awards which also affect the conduct of arbitration in China.[5]

Choosing an arbitral jurisdiction

13. In any arbitration agreement the choice of arbitral jurisdiction is of utmost importance for the disputing parties. The place of arbitration will determine which arbitral institution will conduct the proceedings, the procedure that will apply, and most importantly the governing law for the arbitration.

 
14. As yet there are no provisions in any Chinese legislation which makes it compulsory for arbitration to be held locally. The usual practice under most arbitration agreements is for arbitration to be conducted in the jurisdiction specified in the agreement made between the parties. In the case where a foreign firm has entered into a contract with a Chinese firm, arbitration will therefore take place either in China or the defendant's country, or alternatively, a third country.

 
15. Usually Chinese businesses prefer to have arbitration take place under Chinese law, and usually insist on this when negotiating the arbitration agreement. Consequently, foreign investors generally find that the option of having disputes arbitrated in their own country will not be accepted by the Chinese side, unless a single-sided benefit is given in exchange to the Chinese party. In cases where no consensus is reached, both parties usually agree on arbitration in a third country.

The Arbitration Law

16. Pursuant to article 15 of the Arbitration Law, any arbitration that takes place in China must be conducted according to Chinese laws. However, the Arbitration Law has special provisions for resolving disputes between a Chinese party and an overseas business or investor.

 
17. Pursuant to article 65, where arbitration arises out of economic, trade, transport and maritime disputes involving foreign concerns, Chapter VII entitled "Special Provisions for Arbitration Involving Foreign Concerns" will apply. Other relevant parts of the Law may also apply if there are no applicable provisions in Chapter VII.

The role of CIETAC

18. CIETAC is the principal arbitration body for establishing guidelines in the conduct of arbitration in China.

 
19. However, articles 66 and 73 of the Law make special provision for the China International Chamber of Commerce ("CICC") to establish a commission for arbitrating disputes involving foreign concerns. The Law enables the CICC to draw up regulations for arbitration involving foreign concerns but these regulations must be consistent with the Arbitration Law and the Law of Civil Procedure.

 
20. Whilst the Arbitration Law does not expressly provide that CIETAC has an exclusive jurisdiction to hear disputes arising from cross-border transactions, in reality, litigants prefer to have their cases heard by CIETAC. This is due to the fact that CIETAC has had a lot of experience in dealing with arbitration and has gained a reputation for professionalism.

 
21. At present, CIETAC's 1998 Arbitration Rules ("the Rules") is the accepted standard for settling international commercial disputes in China.

Conducting Arbitration in China

The Commencement of Arbitration

22. The common practice in China is that arbitration will not be carried out unless both the plaintiff and defendant have prepared all necessary documentation required for arbitration.

 
23. Under article 14 of the Rules, the application must contain all relevant information such as the names and addresses of the concerned parties, the plaintiff's claim and the evidence on which the claim is based.

 
24. Once all necessary documentation is received, the commission appointed to undertake the arbitration will notify all concerned parties of the proceedings and forward to them all the relevant details.

 
25. The defendant, under article 18 of the Rules, is entitled to raise objections to the claim or make a counter-claim to the commission within sixty days upon receiving notice of the proceedings.

 
26. If no objection or counter-claim is made to the commission, the arbitration will be conducted on the basis of the evidence provided by the plaintiff.[6]

 
27. The commission can take steps to ensure the conservation of property relevant to a matter in question. The power has the commission to order that property be placed in the custody of a third party. These measures are compulsory and are intended to stop parties removing, selling or discharging assets in order to prevent the successful party from obtaining their due compensation.

 
28. Before making an order for the conservation of property, the commission must obtain the consent of the relevant court. Under article 23 of CIETAC's Arbitration Rules, the relevant court is a court that is situated in the same jurisdiction in which the assets of the disputants or the arbitral body are located.

 
29. The applicant for a conservation order is also required to provide security for costs. Security for costs must be provided in the event that the applicant ultimately loses the case and the other party suffers loss resulting from the making of the order.

 
30. Once the tribunal has been formed, the commission will schedule a date on which the arbitration will commence. However, any party that can provide reasonable grounds to the commission for an extension of time may apply before the commencement of arbitration. Under article 33 of the Rules, an application must be filed no later than twelve days prior to the opening date originally set by the commission.

 
31. Absence without proper excuse will be deemed as non-attendance and proceedings can take place in the absence of that party. The commission is also empowered to make an award in the absence of a non-attending party. In situations where a party does not attend a hearing there is a risk that the commission will reach a decision that is not in favour of the absent party.

Setting up the arbitration tribunal

Single person arbitrator Tribunal

32. A tribunal may consist of one or three arbitrators, as stated in article 30 of the Arbitration Law and articles 24 and 25 of CIETAC's Arbitration Rules. For cost and efficiency reasons parties generally prefer to have the arbitration conducted by a sole-arbitrator.

 
33. The parties in question may, by mutual agreement, appoint either a sole arbitrator to carry out the proceedings, or have the chairman/director of the arbitration commission determine the number of arbitrators. The guidelines for appointment of arbitrators is given under article 25 of CIETAC's Arbitration Rules.

Three person arbitrator Tribunal

34. Situations may arise where each party wishes to appoint their own arbitrator to a three-person tribunal, in these cases the Arbitration Law and CIETAC's Arbitration Rules have different provisions.

 
35. Article 31 of the Arbitration Law states that a third arbitrator must be selected jointly by the litigants or alternatively the arbitration commission director may, at their request, serve as the presiding arbitration officer.

 
36. In contrast to the Arbitration Law, CIETAC's Arbitration Rules (under article 24) provides that the chairman of the arbitration commission will be responsible for appointing a third arbitrator, regardless of being authorised to do so or not.

Qualifications of arbitrator(s)

37. The Arbitration Law states, under article 13, that one of the following credentials must be met in order to qualify as an arbitrator: "(1) Has eight years of arbitration experience; or (2) Has practised as a lawyer for eight years; or (3) Has served as a judge for eight years; or (4) Has studied law or engaged in educational work holding a senior professional title; or (5) Has legal knowledge, and is now working in the fields of economics or trade, and holding a senior professional title."

 
38. CIETAC's Arbitration Rules have identical requirements for the qualifications of an arbitrator. [7]

 
39. CIETAC maintains a Panel of Arbitrators comprising of a mix of Chinese and foreign professionals who have special knowledge and practical experience in the fields of law, economics and trade, science and technology, and other fields. Currently, CIETAC has a 290-person Panel that includes over 80 qualified foreign arbitrators.[8]

General course of the proceedings

40. The procedure adopted in the arbitration will depend upon the nature of the dispute and its complexity. Pursuant to article 32 of the Rules, a formal hearing is not compulsory.

 
41. It has been the practice of CIETAC to only hold an oral hearing when the case is complex in nature. If a hearing is proposed, the case will normally be heard in closed session, however, either party may request an open session but they rarely do so. The hearing is conducted using an inquisitorial approach, this allows both parties to produce evidence in support of the facts in their claims.

 
42. In simple cases, arbitration will generally proceed by way of exchanging written pleadings, letters or submissions to identify the issues in dispute[9]. This process is generally regarded as a very efficient way of settling disputes.

 
43. However, with or without a hearing, the method used for examining, verifying, and evaluating evidence is totally within the discretion of the tribunal. The commission may (but not always) ask witnesses to provide testimony, but in some cases it simply determines the case by virtue of evidence which has already been collected.

 
44. The commission must however reach its decision on the matter in question by a majority vote of the tribunal. Similarly, any award made by the commission must be made by majority vote.

Arbitration Awards

45. An award made by an arbitration tribunal has the same effect as that of a decision made by a court. As already discussed, Chinese law strictly limits access to judicial appeals in cases where the disputing parties have agreed to arbitration. The award given is final and binding upon both parties, and neither party can appeal against the decision of the arbitration commission.[10]

Sovereign immunity

46. The doctrine of sovereign immunity, in which an award against a state-owned enterprise is ineffective, is of considerable concern for foreign investors in China. This is because many foreign investors enter into contracts with Chinese state-owned enterprises and hence those state-owned enterprises may be immune from legal action.

 
47. Existing legislation in China does not provide any clear provisions for the circumstances under which sovereign immunity will be waived. In order to avoid the likely confusion and conflict, the two parties concerned may include a specific clause in their business contract beforehand. The special clause is expressed as representing an irrevocable waiver of sovereign immunity so that the business contract entered between the two parties becomes the equivalent of one between two private business entities. As a result neither will enjoy the benefit of immunity due to any special relation to a State.

Judicial review of an award

48. Only under exceptional circumstances will judicial review of a tribunal's decision be granted. The party seeking judicial review must show to the Court of the place where the arbitration commission is located that the arbitration commission wrongly granted an award. The Court in question, if satisfied with the adequacy of the evidence provided to this effect, may stay the enforcement of the award made by the commission.

 
49. Judicial review may be obtained, if one litigant produces evidence to certify a ruling has one of the following instances:
    "a) there is no written arbitration agreement;
    b) one litigant does not receive any notice as to appointing his arbitrator to carry out the arbitration;
    c) the composition of the tribunal or the arbitral process has violated legal procedure;
    d) the dispute to be settled falls beyond the scope of subject matters specified in the arbitration agreement, or the dispute in question is one which arbitration commission is not empowered to arbitrate; and
    e) the enforcement of the award granted, in the view of the court, will be detrimental to the public interest, e.g. where the evidence on which the arbitration is based is counterfeited, where one litigant has hidden evidence that may affect the impartiality of the final ruling, and where arbitrators have solicited or accepted bribes, taken side with one party and interpreted the law to suit one side."[11]
    
     
50. In general, where a judicial appeal has been granted, the Court will not make any decision on the substance of the award but will simply refer the case to the original tribunal for re-consideration. The position in China is that the court's only role in regards to arbitration commissions is one of support and therefore they will be very reluctant to interfere with a decision of a commission.

Enforcing an award

51. Arbitral awards have the force of law and each party must voluntarily execute them. If any party fails to perform their obligations under the award, within the time limit mentioned, the other party can apply to the court for enforcement of their award.

 
52. The method of enforcement differs, depending on whether a domestic arbitral institution or a foreign arbitral body outside China made the award.

Enforcement of domestic awards

53. Enforcement of domestic awards in China are relatively straightforward. If one party refuses to implement an award made against it, the other party can apply to the court for enforcement.

 
54. The court will review the arbitration procedures adopted in the reference but will not require the evidence to be verified, nor will it investigate whether the law has been properly applied or examine the actual compensation to be paid to the successful party. Therefore, in the absence of obvious material irregularity, the court will not hesitate to enforce an award.

 
55. The enforcement of a domestic award for property located outside China is slightly more complicated. This usually involves a request by the relevant Chinese court for judicial assistance from a foreign court. Such requests are based on the principles of reciprocity and on bilateral or multinational agreements covering judicial assistance that China has signed.

Enforcement of foreign awards

56. Awards granted by overseas arbitral bodies are recognised and enforced in China. According to article 269 of the Civil Procedure Law, enforcement is available means of seeking judicial assistance from the relevant Chinese court. The court will normally recognise and enforce a foreign award if it can be shown that the courts in the foreign country in question will similarly enforce an award made in China.

 
57. The Chinese court will also need to consider whether such an award will not contradict any relevant requirements set forth by Chinese law and that the execution of such an award is not in any way against local public interest. If the court is of the opinion that execution of the award is contrary to Chinese law, the foreign award will be refused and returned to the foreign court for re-consideration.

Summary

58. The above legal review is a brief outline of the current developments in China's new arbitration regime. The reforms in the area of arbitration reflect the Chinese government's attempt to encourage further investment by bringing China in line with developed nations. One significant aspect of this policy is China's participation in major international conventions and treaties for the protection of foreign investment, especially in relation to arbitration of international commercial disputes.

 
59. Whilst the current arbitral regime has only recently been established it is to be expected that confusion may arising from the interpretation of the legislation because of the vagueness of the drafting. Such areas include the requirements for establishing arbitration commissions, the professionalism of arbitrators and the scope of judicial review. However, it is likely that in time the new Arbitration Law will become more defined and workable. Eventually it is hoped that foreign investors will become increasingly confident of the standard of arbitration conducted in China.