Arbitration in mainland China’s free trade zones aiming to match international standards

In summary

The Pilot Free Trade Zone (FTZ) strategy is a bridgehead of the Belt and Road initiative, and a testing ground of international industrial cooperation. It also marks the highest standard of China’s investment and trade reform. Since the establishment of the China (Shanghai) Pilot Free Trade Zone (SHFTZ) in 2013, 18 provinces have followed suit, and the Lingang Special Area (the Lingang Area) promises to take things one step further. Under the framework of the 1995 Arbitration Law of the People’s Republic of China (the Arbitration Law), arbitration institutions in mainland China, judicial review bodies and administrative organisations have issued measures in favour of the development of arbitration in the FTZs. This article covers, the experience of the Shanghai International Arbitration Center and judicial support in the SHFTZ, and the challenges under the new arbitration policies in the Lingang Area.

Discussion points

The interplay between the China (Shanghai) Pilot Free Trade Zone Court of Arbitration, the FTZ Arbitration Rules, and the courts.

Arbitration in the Lingang Area:

• Overseas arbitration institutions.
• Shanghai International Dispute Resolution Center (SIDRC).
• Diversified dispute resolution mechanisms.
• Quasi ad hoc arbitration China-style and exploration of interim measures in the Lingang Area.

Referenced in this article

• The FTZ Arbitration Rules.
• 2014 Opinions on Judicial Review and Enforcement.
• 2015 Circular of the State Council on Issuing the Plan for Comprehensively Deepening the Reform and Opening-up of China (Shanghai) Pilot Free Trade Zone.
• 2016 Opinions on Judicial Guarantee.
• 2019 Overall Plan of the Lingang Special Area of the China (Shanghai) Pilot Free Trade Zone.
• 2019 Opinions to Provide Judicial Services and Guarantees.
• 2019 Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region.

Aspiring to international standards

The FTZ Arbitration Rules

At its core, the Shanghai Pilot Free Trade Zone (SHFTZ), is intended to enact innovative rules and systems. From its implementation in 1995 up to 2013, China’s Arbitration Law restricted development of domestic arbitration rules and practice, which led to the country lagging behind modern practice. At the same time, under the influence of the amendments of the 2006 UNCITRAL Model Law on International Commercial Arbitration and the 2010 United Nations Commission on International Trade Law Arbitration Rules (the UNCITRAL Arbitration Rules), international arbitration went through a great transition leading a number of well-known international arbitration institutions to modify their rules.

The Shanghai International Arbitration Center (SHIAC) established the China (Shanghai) Pilot Free Trade Zone Court of Arbitration in the SHFTZ in October 2013, to provide consultation, case filing and arbitral hearings and other services for parties in the SHFTZ. In May 2014, SHIAC released the China (Shanghai) Pilot Free Trade Zone Arbitration Rules (the FTZ Arbitration Rules) incorporating the most advanced arbitration theory and practice at the time. The FTZ Arbitration Rules adopted emergency tribunals, arbitrator appointment outside the panel list, mediation by mediator, joinder of third parties in arbitration, the small claims procedure, award ex aequo et bono in mainland China and revised interim measures, and consolidation of arbitrations and evidence.

These innovative rules not only became the reference point for amendment of the arbitration rules of other domestic arbitration institutions from 2014 to 2016, but also received great attention from further afield. In 2015, the State Council issued a Circular on Issuing the Plan for Comprehensive Deepening the Reform and Opening-up of China (Shanghai) Pilot Free Trade Zone, which mentions the improvement of arbitration rules in FTZs and sets the goal of making Shanghai a ‘globally oriented’ arbitration centre in the Asia-Pacific region. The FTZ Arbitration Rules were also highly praised by the head of the UNCITRAL Regional Centre for Asia and the Pacific at the time, for innovation and inspiring regional arbitration reforma.

FTZ Arbitration Rules optimising dispute resolution modes

The innovations of the FTZ Arbitration Rules, including articles of consolidation of arbitration, mediation by mediators, open panel and small claims procedure have already been used in practice. The following examples were two cases of medical equipment and consumables distribution agreements that were accepted by SHIAC. Company F, the claimant, was a foreign-invested enterprise registered in the SHFTZ. Company H and Company P were two distributors that had concluded distribution agreements with Company F to sell the equipment in certain areas. As Company H and Company P refused to pay the price of the products, Company F filed two arbitration suits. After proceedings commenced, Company H and Company P separately applied for mediation. With the consent of Company F, the Chairman of SHIAC appointed Mr G as the mediator in the two cases according to article 50 of the FTZ Arbitration Rules. Through five rounds of mediation, the three parties reached a package of settlement agreements. To enforce the settlement agreements, the parties all agreed to continue the arbitration. Once the mediation procedure ended, the arbitration procedure started with two arbitral tribunals constituted according to the arbitration agreement. The parties then requested the examination of the two cases on the basis of documents and consolidated the cases. In the end, the tribunals rendered a single award according to the settlement agreements and the result of the dispute resolution was recognised by all parties. In the above two cases, the articles of mediation by mediators, mediation in arbitration and consolidation of arbitration were used to resolve the disputes effectively and efficiently.

The FTZ Arbitration Rules have been in place for over six years now. As of November 2019, SHIAC had accepted more than 650 cases in connection with the SHFTZ, with a total of more than 12 billion yuan in dispute. To date, parties in five cases have recommended arbitrators that are not listed in the panel, and mediators have been appointed for mediation in 10 arbitrations.

Judicial support for arbitration in the SHFTZ

The FTZ Arbitration Rules have also obtained the support from courts. Within one week of the release of the FTZ Arbitration Rules, Shanghai No. 2 Intermediate People’s Court enacted its Opinions on Judicial Review and Enforcement,^[1] in which the articles were stipulated to correspond to the innovative rules of the FTZ Arbitration Rules. The Opinions on Judicial Review and Enforcement set up a green channel for cases applying the FTZ Arbitration Rules whereby case filing and review are more efficient, the amount of security deposit required for preservative measures is lowered and the enforcement of awards is actively guaranteed. The China (Shanghai) Pilot Free Trade Zone Court of Arbitration, the FTZ Arbitration Rules and the Opinions on Judicial Review and Enforcement jointly make up an arbitral troika in the SHFTZ.

Later on, Shanghai No. 1 Intermediate People’s Court released its Guidelines on the Trial of Cases involving the China (Shanghai) Pilot Free Trade Zone, which also facilitate preservative measures in arbitrations related to the SHFTZ.

Another improvement is reflected in identification of foreign-related elements where the arbitration clause is concluded between wholly foreign-funded enterprises registered in the SHFTZ. In the past, companies registered under Chinese law would be regarded as Chinese companies regardless of their capital source and composition, and the validity of the arbitration clause arising out of non-foreign related cases but requesting foreign arbitrations would be denied. In the SHFTZ, however, arbitration agreements in these cases are not necessarily invalid. In Siemens International Trade Co Ltd v Shanghai Golden Landmark Co Ltd (a case concerning application for recognition and enforcement of a foreign arbitral award),^[2] it was stipulated that:

where the wholly foreign-owned investment enterprises registered in the FTZ mutually agree to submit the commercial dispute to foreign arbitration, the relevant arbitration agreement shall not be treated as invalid merely on the ground that there is no foreign factor involved in such dispute.

The decision was also adopted in the Opinions on Judicial Guarantee.^[3]

Arbitration regime reform in the Lingang Area

Arbitration institutions and the SIDRC

In August 2019, the Overall Plan for Lingang Special Area of China (Shanghai) Pilot Free Trade Zone clearly stipulated that well-known overseas arbitral and dispute resolution institutions could establish business divisions in the Lingang Area. Later on, the Shanghai Bureau of Justice published the Administrative Measures for Business Offices Established by Overseas Arbitration Institutions in Lingang Special Area of China (Shanghai) Pilot Free Trade Zone (the Administrative Measures), in which specific rules are enacted for the establishment of business divisions of overseas institutions. This was an important internationally facing step forward for China’s arbitration legal service market.

As one of the earliest arbitration institutions to deal with foreign-related arbitration in China, SHIAC maintains close connections with overseas arbitration institutions and practitioners. In 2019, the Shanghai International Dispute Resolution Centre, which is jointly initiated by SHIAC, the Shanghai World Trade Centre Association and other institutions, was officially announced at the Shanghai International Arbitration Summit during the Second China International Import Expo. The Shanghai International Dispute Resolution Centre invites well-known international dispute resolution institutions and commercial mediation institutions to base their offices there. This effectively corresponds to article 15 of the Administrative Measures, which stipulates that ‘Shanghai Municipal Bureau of Justice will encourage and guide the Business Offices to operate and conduct foreign-related arbitration activities in a centralised way in the administrative region of the Shanghai municipality.’ At the time of writing, the Singapore International Arbitration Centre (SIAC), Shanghai Arbitration Association (SHAA) and China (Shanghai) Pilot Free Trade Zone Court of Arbitration had opened offices in the Shanghai International Dispute Resolution Centre. Other institutions including the ICC, HKIAC and KCAB have also shown some interest in the site.

The establishment of business divisions of overseas arbitration institutions and the settlement of well-known international dispute resolution institutions in the Shanghai International Dispute Resolution Centre will provide Chinese parties with the one-step dispute resolution service. Along with the opening of business divisions of overseas arbitration institutions, the actual practice of arbitration rules and case administration will also be introduced into China. Meanwhile, Chinese elements including laws, language and lawyers will frequently appear in overseas arbitration institutions. However, new problems may arise by overseas arbitration institutions doing business in mainland China, such as the identification of foreign-related elements, nationality of the awards, and the judicial review standard of applicable laws, which will be a great challenge for the arbitration system and the professional arbitration community in China.

China International Commercial Courts

In line with various other initiatives such as the Singapore International Commercial Court, the Netherlands Commercial Court and the Dubai International Financial Centre Courts, on 29 June 2018, the Chinese Supreme People’s Court (SPC) announced the establishment of the China International Commercial Courts (CICC) and designated several qualified Chinese international commercial mediation institutions and international commercial arbitration institutions to jointly build an integrated platform of mediation, arbitration and litigation with CICC, to form a ‘one-stop’ international dispute resolution mechanism. In December 2018, SHIAC became one of the first five international commercial arbitration institutions to be included in the SPC’s one-stop mechanism. CICC is a permanent adjudicative body dealing with international commercial disputes. To date, CICC institutions have ruled on challenges to the validity of arbitration agreements in three international commercial arbitration cases. Apart from the trial of international commercial disputes, CICC also accepts applications for preservative measures, enforcement or set-aside of arbitral awards in international commercial arbitration cases, which are accepted by certain arbitration institutions.

According to the Opinions to Provide Judicial Services and Guarantees^[4] and the opinions relating to the Lingang Area issued by Shanghai High People’s Court, it is stipulated that an international commercial dispute trial organisation would be built in the Lingang Area and a diversified dispute resolution mechanism that integrates mediation, arbitration and commercial litigation would be established. Therefore, following Shenzhen and Xi’an, the Lingang Area would probably become the third place to build an international commercial trial organisation. The establishment of an international commercial dispute trial organisation in the Lingang Area would further improve the judicial support for arbitration in the Lingang Area.

Quasi ad hoc arbitration and interim measures

In 2016, the SPC issued the Opinions on Judicial Protection, which for the first time specified that:

where enterprises registered in the FTZ agree to conduct arbitration of a relevant dispute at a specific location in China, in accordance with specific arbitration rules and by a specific person or persons, such arbitration agreement may be found to be valid.

In 2019, the SPC issued the Opinions to Provide Judicial Services and Guarantees, which indicated support for this form of arbitration again.

According to article 16 of the Chinese Arbitration Law, ad hoc arbitration is deemed not to be permitted in China, as a valid arbitration clause shall include an arbitration institution. This form of arbitration specifying the location, rules and adjudicators of the arbitration is seen as limited recognition of ad hoc arbitration by Chinese courts under the current Arbitration Law. SHIAC is experienced in dealing with cases that apply the UNCITRAL Arbitration Rules. Recently, there have also been cases that applied the Bylaws and Arbitration Rules of International Cotton Association Limited and the Arbitration Rules of the Grain and Feed Trade Association. The validity of arbitration agreements and awards of cases where SHIAC acted as the appointing authority or the procedure administration institution have been recognised various times by the courts in Shanghai. To provide standardised services for ad hoc arbitration, SHIAC is planning to issue a service guide for ad hoc arbitration, especially in respect of arbitrator appointment, administrative assistance, financial management and other services.

Apart from the services and arrangements for ad hoc arbitration, SHIAC has tried to explore the mechanism of interim measures. As early as in 2014, a chapter called ‘Interim Measures’ was added to the FTZ Arbitration Rules, which was the first time that interim measures had been used as a legal term and normatively mentioned in the arbitration rules of a mainland China arbitration institution. On 1 October 2019, an Arrangement^[5] officially took effect, which was the first time that formulated rules of the SPC assisted with interim measures in arbitrations seated and administered outside mainland China. With regard to the Arrangement, parties of arbitral proceedings in Hong Kong may apply for interim measures (including ‘conduct preservation’ orders) to competent intermediate courts in mainland China. Also in the 2019 Opinions to Provide Judicial Services and Guarantees and the opinions issued by Shanghai High People’s Court with regard to the Lingang Area, judicial support is stipulated for interim measures application in foreign-related arbitration cases, while conduct preservation orders, especially injunctions, are included in the categories of interim measures of foreign-related arbitration cases in the SHFTZ. Therefore, it can be anticipated that in foreign-related FTZ arbitration cases accepted by SHIAC, parties may submit applications for conduct preservation in cases apart from property preservation and evidence preservation.

Notes

^[1] 2014 Opinions on Judicial Review and Enforcement of Arbitration Cases Applying China (Shanghai) Pilot Free Trade Zone Arbitration Rules.

^[2] (2013) Shanghai No. 1 People’s Court (Waizhong) Zi No. 2.

^[3] 2016 Opinions of the Supreme People’s Court on Providing Judicial Guarantee for the Construction of Pilot Free Trade Zones.

^[4] 2019 Opinions of the Supreme People’s Court for All People’s Courts to Provide Judicial Services and Guarantees for the Construction of the Lingang Special Area of the China (Shanghai) Pilot Free Trade Zone.

^[5] Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region.