19 January 2010
The People's Republic of China (PRC) now conducts more arbitrations than any other country and has become of one the most important places for commercial arbitrations in the world. The main PRC institutions responsible for foreign-related arbitrations1 are China International Economic and Trade Arbitration Commission (CIETAC), China Maritime Arbitration Commission and local arbitration institutions established by various local government authorities. CIETAC is the world's leading arbitration institution in terms of the number of cases handled; in 2008 alone, CIETAC accepted 1,230 cases for arbitration, nearly twice as many as the ICC.
Further, the growth in foreign investment in the PRC and the continued expansion of trade links between the PRC and the rest of the world, even in the current world recession, coupled perhaps with an unwillingness by foreign parties to conduct disputes in PRC courts means that PRC arbitration institutions will only become busier.
Against the background of the PRC’s growing world importance as a place for foreign-related arbitrations, the purpose of this article is to provide an introduction to arbitration within the PRC, with particular reference to arbitrations conducted under the Arbitration Rules of CIETAC (CIETAC Rules).
Arbitration in the PRC
Arbitration in the PRC is regulated by the Arbitration Law 1995. The Arbitration Law divides arbitrations into domestic arbitrations (i.e., involving PRC-incorporated entities only) and arbitrations with a foreign element. Each has a separate legal framework. One of the main differences between the two is that the PRC courts have more extensive powers to review and to refuse enforcement of a domestic arbitral award than a foreign-related arbitral award.
The powers of a PRC court to review a foreign-related arbitral award (i.e., an arbitral award made by a PRC arbitration institution with a foreign element) are limited and broadly similar to the grounds upon which a court may refuse to enforce an arbitration award under the New York Convention. This article focuses on foreign-related arbitrations. However, foreign investors who have used a "wholly foreign owned enterprise" (WFOE) as their investment vehicle in the PRC should note that a WFOE is considered to be a domestic party for the purpose of the Arbitration Law.
Like the laws of most jurisdictions, the PRC’s Arbitration Law prohibits arbitration for matrimonial proceedings, adoption proceedings, inheritance issues and "administrative disputes," i.e., disputes between different government departments or involving a government department.
Unlike most other jurisdictions, though, one rather unique feature of the Arbitration Law requires that all arbitrations in the PRC are administered by a PRC arbitration institution. PRC law prohibits “ad hoc” arbitrations. This prohibition has led to a concern that an award obtained from an overseas ad hoc arbitration might not be enforceable in the PRC. In fact, this is not the case. The PRC has acceded to the New York Convention and ad hoc arbitrations obtained in foreign countries are enforceable in the PRC under that Convention. In 2007, the Supreme People's Court confirmed that awards resulting from ad hoc arbitrations conducted in Hong Kong were enforceable in the PRC. No logical distinction should, of course, be drawn between awards made in ad hoc arbitrations conducted in Hong Kong and those made in other countries since Hong Kong, for all practical commercial purposes, is viewed as "foreign" as opposed to "domestic."
A related issue is the extent to which an award from an ICC arbitration that takes place in the PRC, is enforceable in the PRC. The doubt over the enforceability of ICC awards results from the fact that the conduct of ICC arbitration in the PRC may fall foul of the Arbitration Law, which requires arbitration in the PRC to be conducted by a PRC arbitration institution. This issue was dealt with recently by the Ningbo Intermediate People's Court in Dufercos. A v. Ningbo Arts & Crafts Import & Export Co Ltd, where it was held that an award from an ICC arbitration conducted in Beijing could be enforced in the PRC. The court's reasoning was that the arbitration award was a "non-domestic," and was therefore enforceable under the New York Convention, despite the fact that the arbitration took place in the PRC. It should be noted that the PRC, as a civil law jurisdiction, does not adopt a precedent system. Consequently, the Ningbo decision is not binding on subsequent court decisions, but to many foreign investors, the Ningbo decision will be welcomed.
Over the years, the Arbitration Law has been refined by the Supreme People's Court through the issuance of various notices and replies. Again, like most jurisdictions, arbitral awards are enforceable as if they were court judgments, subject to certain residual powers of the People's Court to refuse enforcement in defined circumstances. It was a concern to most foreign investors that the lack of uniformity by the Intermediate People's Court across the country, and a possible indiscriminate exercise of these powers to refuse enforcement of a foreign arbitral award (i.e., a convention award under the New York Convention) or a foreign-related arbitral award, could effectively sterilise these arbitral awards.
However, this concern has now been addressed. Upon receipt of an application for enforcement of a foreign, or foreign-related, arbitral award, the Intermediate People's Court will examine the award and decide whether the award is enforceable in the PRC. Any decision by that Court not to enforce the award immediately triggers an internal review mechanism under which a ruling not to enforce a foreign, or foreign-related, arbitral award must be submitted to the next-highest People's Court; if that higher court's decision is that the award should not be enforced, the matter must be submitted for review by the Supreme People's Court. This review procedure has ensured uniformity in approach.
CIETAC was first established in 1956. Today, it handles more cases annually than any other arbitration centre. More than 10,000 foreign-related arbitrations have been administered by CIETAC.
The CIETAC Rules adopt a "fully administered" system of arbitrations in which the CIETAC secretariat takes an active role, similar to ICC arbitrations. The CIETAC Rules themselves were amended in 2005 and now the CIETAC Rules are broadly in line with international practice. Generally the CIETAC Rules confer flexibility on the arbitration process by allowing the parties to agree on the following matters:
- The place of arbitration and/or hearing
- The language of the arbitration
- The number of arbitrators
- The nationality of the arbitrators
- The method of selection of arbitrators
- The applicable law of the contract
- The application of ordinary procedure or summary procedure
The PRC is now an established and important part of the international arbitration community. Following the 2005 amendments to the CIETAC Rules, foreign-related arbitrations are now brought very much in line with international practice and have a high degree of flexibility. CIETAC has now enjoyed the reputation it rightly deserves and will no doubt continue to grow at a pace which is commensurate with that of the economy of the PRC.
1. An arbitrations with a "foreign element" is generally taken to mean an arbitration where one or both parties in the dispute are foreign persons or a company or organisation domiciled in a foreign country, where the subject matter of the dispute is located in a foreign country or where the facts that establish, change or terminate the contract between the parties occur outside of the PRC.