An Advancement Towards Alignment with International Standards

The Arbitration Law of the People’s Republic of China (“Current Arbitration Law”) was promulgated in 1994 and has since then has only been updated incrementally.  A major overhaul is now on the horizon. 

On 30 July 2021, the Ministry of Justice of the PRC published a consultation draft for a revised Arbitration Law (“Consultation Draft”). This represents the first time in over 25 years that substantial amendments to the Arbitration Law have been proposed. 

While the Consultation Draft is not based on the UNCITRAL Model Law on International Commercial Arbitration (a set of model laws designed by the United Nations Commission on International Trade Law to assist states in reforming and modernizing laws on arbitral procedure; “Model Law”), it nonetheless incorporates many features that have become the norm internationally, and seeks to bring the PRC Arbitration Law more in line with international practice.  These features are explored in greater detail below.

FOREIGN ARBITRAL INSTITUTION

Article 12 of the Consultation Draft provides that a foreign arbitral institution establishing foreign-related[1] “arbitration business” in the PRC may now also be registered with judicial administrative departments of the provinces, autonomous regions or municipalities, thereby confirming their status under PRC law.  This clarifies that foreign arbitral institutions can be recognized under the Consultation Draft and accordingly may administer arbitrations seated in mainland China.

The proposed amendments were foreshadowed by two landmark PRC court rulings, Longlide Packaging Co. Ltd V BP Agnati SRL [2013] Min Ta Zi No. 13 and Daesung Industrial Gases Co. v Praxair (China) Investment Co., Ltd. [2020] Hu 01 Min Te No 83. In both cases, the parties designated foreign arbitration institutions such as the ICC and the SIAC to administer their disputes in mainland China. That gave rise to the question of whether foreign institutions could administer mainland China-seated arbitrations, since Article 10 of the Current Arbitration Law provides that arbitration commissions are to be organized by the departments and chambers of commerce of the local government.  Nonetheless, the Supreme People’s Court upheld the arbitration clause in Longlide, as did the Shanghai No. 1 Intermediate People’s Court in Daesung, effectively suggesting that foreign arbitral institutions may administer arbitrations seated in mainland China.

The proposed amendments are a further welcome development for foreign arbitration institutions in mainland China. Institutions like the ICC, SIAC and HKIAC have in recent years set up representative offices in the Shanghai Free Trade Zones, although their activities have been largely limited to liaison and marketing activities but not case administration. These representative offices are expected to play a more significant role once the new Arbitration Law comes into force, and potentially start administering their own cases.

AD HOC ARBITRATION

Article 16 of the Current Arbitration Law requires that arbitration agreements designate an arbitration commission, in order to be valid.  Accordingly, arbitration agreements providing for ad hoc arbitration are prima facie invalid under PRC law.  This contradicts international practice, which generally recognizes ad hoc arbitrations.

That said, recent developments in PRC arbitral jurisprudence indicate a gradual acceptance of ad hoc arbitration.  For example, on 30 December 2016, the Supreme People’s Court issued a notice entitled “Supreme People’s Court Opinion on the Provision of Judicial Safeguards for the Construction of Pilot Free Trade Zone” (2016) Fa Fa No. 34 (30 December 2016) providing that entities registered in free trade zones may be allowed to arbitrate disputes in mainland China without involvement of a PRC arbitration commission. 

The latest Consultation Draft further liberalises the landscape by specifically permitting ad hoc arbitration in certain instances.  Article 91 of the Consultation Draft states that parties to a commercial dispute involving foreign-related elements may agree to arbitration before an ad hoc tribunal.  While Article 91 of the Consultation Draft does not apply to purely domestic cases (such that ad hoc arbitration would remain unavailable for these disputes), this brings the PRC system in line with international practice in respect of international disputes.

KOMPETENZ-KOMPETENZ

The Consultation Draft expressly recognizes the doctrine of “kompetenz-kompetenz” (competence-competence), granting arbitral tribunals the power to rule on their own jurisdiction.  The practical effect of this is challenges to the validity or scope of the arbitration agreement would no longer prevent or stay arbitral tribunals from taking the arbitration forward.

Under Article 20 of the Current Arbitration Law, a party contesting the validity and scope of an arbitration agreement may do so by application to the arbitration commission or the PRC courts, with the court’s jurisdiction prevailing if the applications are simultaneously submitted before the arbitration commission and PRC court.  This has given rise to a situation where parties intending to delay or derail the arbitral process have been able to do so by submitting an application to the PRC courts challenging the validity of the arbitration agreement, resulting in the arbitral proceeding having to stay while the PRC court rules on the issue.  

This will no longer be the case once the Consultation Draft is enacted.  Article 20 of the Current Arbitration Law will be replaced by Article 28 of the Consultation Draft, which provides that if parties intend to challenge the jurisdiction of the arbitral tribunal, they should submit the challenge to the arbitral tribunal directly in accordance with the applicable arbitration rules.  Importantly, Article 28 provides that PRC courts shall not hear challenges to arbitral jurisdiction unless and until the issue has first been decided by the arbitral tribunal itself.  It also provides that where an application is made to the PRC courts challenging the arbitral tribunal’s determination as to jurisdiction, the arbitration process shall not be affected by these court procedures, which is to run in parallel.  Article 28 of the Consultation Draft, therefore, brings the procedure for challenging an arbitral tribunal’s jurisdiction closer to the process under the Model Law.[2]

INTERIM MEASURES

Under Articles 28 and 46 of the Current Arbitration Law, only courts may order interim measures, such that arbitral tribunals have no power to grant interim relief. Articles 46 to 49 of the Consultation Draft changes this regime, and in line with international practice, would grant arbitral tribunals the power to order interim relief.  

In particular, Article 46 of the Consultation Draft provides that a party may, after an arbitration has been commenced, apply either to the relevant court or directly to the arbitral tribunal for interim measures.  Articles 47 and 48 further provide that the PRC courts of competent jurisdiction shall assist in enforcement of interim measures ordered by arbitral tribunals.  Assistance in enforcement by PRC courts appears to only be available if the interim measures were ordered by an arbitral tribunal seated in mainland China.  This is to be contrasted with the Model Law which envisages that interim measures ordered by a foreign arbitral tribunal can also be enforced by the domestic courts.[3]

CONCLUSION

The latest Consultation Draft marks a significant step forward in the reform of the mainland Chinese arbitral regime. While the Consultation Draft stops short of adopting the Model Law, it nevertheless brings PRC arbitration law closer to international practice.  These reforms are no doubt intended to enhance mainland China’s popularity as an arbitral seat, especially in light of the expected increase in international disputes involving Chinese parties as the Belt and Road Initiative matures.  It remains to be seen whether this will be the case.  

The views and opinions expressed in this article are those of the authors and do not reflect the views of Sidley Austin or its clients.

 

[1] A dispute is foreign-related where: (i) at least one of the parties is foreign; (ii) at least one of the parties habitually resides outside of Mainland China; (ii) the subject matter of the dispute is outside of Mainland China; (iv) the legal facts that led to the establishment, change or termination of the transaction occurred outside Mainland China; (v) other circumstances exist such that the underlying transaction should be deemed foreign-related.

[2] See Article 16 of Model Law.

[3] See Article 17H of Model Law.

Jurisdictions

Senior Associate, Sidley Austin

Associate, Sidley Austin

Associate, Sidley Austin