In summary
This chapter encapsulates some of the latest pro-arbitration developments in China, including the adaptation of judicial practice in support of hybrid arbitration agreements and the institutional developments of China’s arbitration industry against the backdrop of modernisation and internationalisation of China’s arbitration regime.
Discussion points
- Validity of hybrid arbitration agreements
- Emergence and growth of specialised arbitration institutions
- Development of capacities for international dispute resolution
Referenced in this article
- Interpretation of the Supreme People’s Court concerning Certain Issues on Application of the Arbitration Law of the People’s Republic of China
- Guidelines of the People’s High Court of Hainan Province on Adjudication of Cases Concerning Validity of Arbitration Agreements (for Trial Implementation) and Typical Cases
- Typical Foreign-Related Commercial Cases of the Primary People’s Court of Pudong New District of Shanghai Municipality
- Notice of the General Office of the State Intellectual Property Office on Building the Capabilities of Intellectual Property Arbitration and Mediation Institutions
- Opinions of the General Office of the CPC Central Committee and the General Office of the State Council on Law-based Crackdown of Illegal Securities Activities
- Opinions of the China Securities Regulatory Commission and the Ministry of Justice on the Pilot Programme of Arbitration in the Securities and Futures Industry in Accordance with the Law
In tandem with the Arbitration Law of the People’s Republic of China (Amendment) (Draft for Comments) (the Draft Amendment) published by the Ministry of Justice on 30 July 2021, a milestone piece of draft legislation that, once adopted, will overhaul China’s conventional arbitration regime (long criticised as ‘outdated’), China is making continuous efforts to create a more open and arbitration-friendly environment that aligns with internationally acceptable standards. We discussed the Draft Amendment in the China chapter of The Asia-Pacific Arbitration Review 2021. In this chapter, we review some of the latest developments with respect to arbitration in China.
Validity of hybrid arbitration agreements
A hybrid arbitration agreement offers parties a choice of different channels of dispute resolution. The flexibility, however, comes with risks of parallel and even conflicting proceedings giving rise to jurisdictional disputes. The validity of such agreements is subject to challenge under Chinese law.
A typical hybrid arbitration agreement is one where the parties are accorded the right to choose between arbitration and litigation so that they may select the forum of dispute resolution after the dispute has arisen (‘either arbitration or litigation’). Another form of hybrid arbitration agreement provides parties with a second bite at the cherry by allowing them to refer the disputes to the competent courts in a particular, or any, jurisdiction if the arbitration fails or if either party refuses to accept the arbitration result (‘arbitration before litigation’).
By virtue of explicit statutory rules, including article 7 of the Interpretation of the Supreme People’s Court concerning Certain Issues on Application of the Arbitration Law of the People’s Republic of China (the Arbitration Law Interpretation), which makes it clear that an arbitration agreement providing for a party’s right to select between arbitration and litigation is invalid, the Chinese courts used to scrutinise both types of hybrid arbitration agreements and tended to negate the validity of the arbitration agreements in their entirety. Although it is too early to declare a reversal of the position, it is clear that the courts are becoming more cautious in their approach and the latest judicial practice is showing a trend favouring validity or partial validity of hybrid arbitration agreements.
In an exemplary case recently published by the People’s High Court of Hainan Province along with the Guidelines of the People’s High Court of Hainan Province on Adjudication of Cases Concerning Validity of Arbitration Agreements (for Trial Implementation), the arbitration agreement provided that the disputes can be either submitted to arbitration or resolved through legal procedures. The First Intermediate People’s Court of Hainan Province adjudicated that the arbitration agreement was not invalid because the use of the term ‘legal procedures’, which might include arbitration, litigation and mediation, should not be interpreted as being intended to refer to litigation and, therefore, the arbitration agreement should not be regarded as one of ‘either arbitration or litigation’. The court’s restrictive interpretation of ‘legal procedures’ to avoid invalidation of the arbitration agreement is no doubt an attestation of its pro-arbitration stance.
The issue is more controversial and complicated when it comes to arbitration agreements envisaging ‘arbitration before litigation’.
Agreement providing for litigation if the disputes fail to be submitted to arbitration
In a case in 2019, the Supreme People’s Court decided that an arbitration agreement under which the parties were entitled to resort to courts if and after they failed to submit the disputes to arbitration was invalid because arbitration was not intended by the parties to be the determinative and final resolution of disputes. Where a similar arbitration agreement was challenged, the Intermediate People’s Court of Nantong City, Jiangsu Province held that such an agreement was, in essence, an agreement of ‘either arbitration or litigation’ and was therefore invalid in accordance with article 7 of the Arbitration Law Interpretation.
In recent years, there has been an increased number of cases that have sustained the validity of arbitration agreements, although the reasoning of the courts varied. For example:
- In the 2017 case Su Min Shen No. 4452, the High People’s Court of Jiangsu Province refused to nullify an arbitration agreement entitling the parties to institute litigation in the event of failure of arbitration because the court was of the view that the parties’ common intention to arbitrate was clear and the choice of arbitration was not selective.
- The High People’s Court of Liaoning Province held in the 2018 case Liao Min Shen No. 4074 that the parties’ agreement of ‘arbitration before litigation’ related to a sequence of dispute resolution but was not a selection between arbitration and litigation as contemplated by article 7 of the Arbitration Law Interpretation, and the Fourth Intermediate People’s Court of Beijing Municipality expressed similar views in the 2019 case Jing 04 Min Te No. 382.
- In the 2018 case Yu 01 Min Te No. 12, the Intermediate People’s Court of Zhengzhou City, Henan Province upheld the validity of an arbitration agreement allowing the parties to submit disputes to a particular court if the arbitration did not succeed by interpreting the agreement to be one providing for arbitration and at the same time agreeing on court jurisdiction in the event that the arbitral award was set aside.
- When the same or a similar line of interpretation was not available because the agreement provided for the court’s jurisdiction ‘if no settlement was reached in the arbitration’ and could not be said to confine the court’s jurisdiction to the circumstance where the arbitral award was set aside, the Intermediate People’s Court of Guangzhou City, Guangdong Province opined in the 2019 case Yue 01 Min Xia Zhong No. 811 that the agreement to arbitrate was valid, but the agreement concerning litigation was invalid because the latter was contrary to Chinese law regulating arbitration and its relationship with litigation.
Agreement providing for litigation after the arbitral award has been rendered
Another prominent adaptation of judicial practice with respect to ‘arbitration before litigation’ agreements concerns the validity of agreements whereby parties have the right to bring litigation after the disputes have been resolved through arbitration but either of the parties is not pleased with the arbitration result.
In the past, such arbitration agreements were more likely to be ruled as null and void by the courts. For instance, in the 2013 case Min Er Zhong Zi No. 81, where the arbitration agreement provided that a suit could be filed before the court at the place where the contract was entered into if either party objected to the arbitral award, the Supreme People’s Court concluded that the arbitration agreement was invalid because it violated the relevant rules of arbitration in China concerning ‘finality of arbitral awards’ and the exclusivity of the arbitral jurisdiction.
Nowadays, however, the Chinese courts seem to have come to a broad consensus that the parties’ agreement to arbitrate should be supported, though the agreement to refer the same disputes to litigation after the arbitral award is rendered or subject the arbitral award to substantive appeal might be found unenforceable or invalid.
In the 2020 case Jing 04 Min Te No. 21, the arbitration agreement stipulated that:
[j]udgment upon the award may be entered in any court having competent jurisdiction and the parties expressly submit to the exclusive jurisdiction of the courts of the People’s Republic of China for any such action including, without limitation, to recover any costs and attorneys’ fees incurred by the prevailing party in the arbitration in confirming and enforcing the award, or to apply for the provisional or interim remedies provided for herein.
The Fourth Intermediate People’s Court of Beijing Municipality held that the arbitration agreement was valid because the agreement that ‘[j]udgment upon the award may be entered in any court having competent jurisdiction’ could not be interpreted as a choice of ‘either arbitration or litigation’ but should be interpreted as the parties agreeing to refer the arbitration award to the competent court for judicial supervision, which was in line with the relevant rules of the law regarding judicial review of arbitral awards.
Even if there was no room for the interpretation adopted by the Fourth Intermediate People’s Court of Beijing Municipality in Jing 04 Min Te, the courts also found little difficulty in upholding the validity of the agreement to arbitrate in the following cases.
- In the 2015 case Ha Min Yi Min Chu Zi No. 106, the Intermediate People’s Court of Harbin City, Heilongjiang Province determined that the agreement providing for arbitration and then litigation if either party objected to the arbitral award was legally effective.
- Taking a more prudent approach, in the 2018 case Jing Min Te No. 237, the Fourth Intermediate People’s Court of Beijing Municipality affirmed the effectiveness and validity of the parties’ agreement to arbitrate, but at the same time opined that the parties might have been erroneous in their understanding of the law when they agreed that a party might lodge complaints before the court at the place of its residence if the party was not satisfied with the arbitration result and ruled that this agreement with respect to litigation was legally untenable and unenforceable.
- More recently, in the 2020 case Hu 01 Min Xia Zhong No. 780, published in the Typical Foreign-Related Commercial Cases of the Primary People’s Court of Pudong New District of Shanghai Municipality as one of the few cases showcasing Shanghai courts’ judicial efforts in resolving foreign-related disputes, the First Intermediate People’s Court of Shanghai Municipality dismissed the action brought under a certain contract because the parties agreed under the contract to refer the relevant disputes to arbitration at the Singapore International Arbitration Centre. Although it was also agreed under the contract that either party could refer the same disputes to the court of a particular jurisdiction if the parties failed to consent to the arbitration result, an agreement that was against ‘finality of arbitral awards’ and was held to be invalid, the court decided that the parties’ agreement to arbitrate was still valid because their consensual choice of arbitration took priority over that of litigation and, hence, the agreement was not a selection of ‘either arbitration or litigation’ and that the invalidity of the agreement concerning litigation does not impact the agreement on arbitration.
Parties are advised to avoid hybrid arbitration agreements as they risk negative treatment by the Chinese courts. That being said, it can hardly be denied that the courts are generally trying to save hybrid arbitration agreements to the extent possible and this pro-arbitration trend is part of China’s efforts to support and encourage the development of its arbitration industry.
Emergence and growth of specialised arbitration institutions
In addition to long-standing generalist arbitration institutions – the China International Economic and Trade Arbitration Commission (CIETAC), the Beijing Arbitration Commission and the Shenzhen Arbitration Commission, to name a few – there has been a trend in establishing arbitration institutions that specialise in particular sectors of the economy to better adapt to the features and needs of the particular industry, and to provide better suited rules of arbitration proceedings aimed at increasing the efficiency of proceedings and lowering their costs. For example, there has been an emergence of institutions specialising in disputes relating to intellectual property, finance and tourism.
Intellectual property
Traditionally, disputes concerning intellectual property were mostly heard before national courts, as intellectual property rights, such as patents, are granted by national authorities and it was argued that disputes regarding such rights should be resolved by a public body within the national system. Nevertheless, it is now broadly accepted that, under Chinese law, except for disputes over validity of patents and trademarks, the determination of which should be reserved to the sole jurisdiction of state authorities, disputes in relation to intellectual property, including disputes over copyright validity and contractual or tort disputes relating to copyright, patents and trademarks, can generally be resolved through arbitration.
Arbitration confidentiality is an attractive attribute for parties to intellectual property-related cases owing to the sensitive nature of the information and data that might be involved. Another benefit of arbitration for intellectual property disputes is the mechanism to appoint arbitrators with qualified expertise where specialist knowledge is required to resolve what are usually technical disputes. In addition, compared to state court proceedings, which are susceptible to an actual or a perceived ‘home team’ advantage for a party that litigates in its own country, arbitration may be a preferred method of dispute resolution as more intellectual property cases now involve parties from different jurisdictions. For these reasons, there has been a shift towards arbitration for intellectual property disputes.
In this context, specialised dispute resolution centres and arbitration institutions have been and are continuing to be set up nationwide. These include, among others, the Shanghai Arbitration Court of Intellectual Property, the China (Shenzhen) Intellectual Property Arbitration Centre and the Guangzhou Arbitration Commission (Baiyun) Intellectual Property Arbitration and Mediation Centre. Pursuant to the Notice of the General Office of the State Intellectual Property Office on Capability Building of Intellectual Property Arbitration and Mediation Institutions circulated around March 2018, the arbitration services of these institutions will continue to be optimised under the auspices of the Chinese state authorities.
Finance
Arbitration is also becoming more popular in the financial sector, and institutions providing highly specialised services to resolve financial disputes are beginning to emerge. This can, in part, be attributed to the ever more complex financial products, financial transactions and activities of financial entities. It is also a response to the increased interest and demand for the specific expertise and experience required to resolve disputes in accordance with the evolving regulatory rules to protect financial investors and consumers, and address information asymmetry and nuances in financial markets.
In July 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the Opinions on Law-based Crackdown of Illegal Securities Activities, announcing the launch of a pilot programme for securities arbitration. Shortly thereafter, in the Opinions on the Pilot Programme of Arbitration in the Securities and Futures Industry in Accordance with the Law, the China Securities Regulatory Commission and the Ministry of Justice formulated more detailed requirements concerning the construction and promotion of an arbitration system tailored for disputes in connection with securities and features, including the establishment of specialised arbitration centres and a selection of suitably qualified arbitrators, such as professionals and experts from the financial market and people with experience in regulatory bodies.
On 1 November 2021, the China (Shenzhen) Securities Arbitration Centre, the first of its kind, was established. The centre is a joint initiative between the Shenzhen Court of International Arbitration and the Shenzhen Stock Exchange, and offers a new option of dispute resolution that caters to the needs of players in global financial markets. In line with the government-endorsed pilot programme, it is expected that more securities arbitration centres or institutions will come into being in the near future.
Tourism
Tourism is one of China’s leading industries. While tourism-related disputes are not uncommon, it lags behind many other industries in both understanding and use of arbitration, especially for disputes involving individual tourism consumers. Inexperience with regard to arbitration and an absence of arbitration clauses in tourism contracts might be major reasons for arbitration not being used. There are also likely to be concerns related to time and costs of arbitration as it might be considered ‘unworthy’ to resort to arbitration for tourism disputes, which often involve relatively minor monetary claims. In the event of a dispute, more often than not tourists file complaints to the competent government authorities, but the administrative and bureaucratic nature of the process may not always lead to efficient resolution of the dispute.
To accommodate the characteristics of the tourism industry, efforts are being made to set up specialised dispute resolution institutions. In March 2019, a tourism arbitration centre was jointly established in Hainan Province, the famous island province in Southern China, by the Hainan Court of International Arbitration and the Hainan Provincial Department of Tourism, Culture, Radio, Television and Sports as part of the aim to promote Hainan Province to be an international tourism destination. The centre is capable of handling disputes relating to tourism consumption, investment and project construction. On 11 June 2021, the Ministry of Justice and the Ministry of Tourism jointly promulgated the Notice on the Pilot Work of Coordination and Liaison between Tourism Complaint Mediation and Arbitration, which announced the plan to establish specialised arbitration platforms for tourism complaints and disputes in 34 pilot cities across the nation. It is yet to be seen whether and how the rules and procedures of specialised arbitration institutions could be customised to increase the effectiveness of resolving tourism-related disputes.
Development of capacity for international dispute resolution
Since the concept of Belt and Road Initiative (BRI) was laid out by President Xi Jinping in 2013, BRI has been known to be the world’s largest transnational programme of infrastructure investments. While promising to generate massive trade and growth across the economies in Asia, Europe and Africa, this grand scheme will presumably result in a corresponding increase in cross-border commercial disputes arising from various causes such as market entry, joint ventures, project financing and construction, international trade in goods, etc, among different stakeholders, including parties to construction or trade contracts, lenders, guarantors, insurers and even the host governments. The fallout from the covid-19 pandemic will only add to the occurrence and complexity of the disputes.
Arbitration is commonly seen as one of the best available and primary processes for resolving international commercial disputes, largely due to its nature of neutrality, confidentiality, flexibility and party autonomy. To maintain and expand their international appeal in light of the potential rise of cross-border disputes, Chinese arbitration institutions have been taking progressive measures to develop their international presence and capabilities.
For example, the CIETAC, one of the most active and eminent players in China’s international arbitration market, took steps in 2017 and 2018 to set up branches both at home and abroad to provide arbitration services for international commercial disputes, especially those involving BRI countries and regions, including the CIETAC Silk Road Arbitration Centre in Xi’an, China, the CIETAC North America Arbitration Centre in Vancouver, Canada and the CIETAC European Arbitration Centre in Vienna, Austria. In August 2019, the Beihai Asia International Arbitration Centre was launched in Singapore by the Beihai Arbitration Commission, the first-ever international arbitration centre in Singapore established by a Chinese arbitration institution. The Centre aspires to provide lower-cost and efficient international arbitrations for low- to medium-value disputes and support the resolution of disputes arising from the BRI and the economic activities between Chinese and ASEAN parties under the modified UNCITRAL arbitration rules.
Looking to the future, a hybrid process that combines a variety of techniques and methods of alternative dispute resolution (ADR) – from direct negotiation with no outside interference, to mediation where parties are encouraged to reach a compromise with the assistance of an impartial third party, to arbitration where a neutral panel makes a decision that is binding on the parties in a structured adversarial proceeding – is becoming a trend in international commercial dispute resolution and is also becoming more integrated in state proceedings. Chinese arbitration institutions and the Supreme People’s Court are now working towards more flexible and innovative uses of ADR for international commercial disputes.
In the Belt and Road Arbitration Institutions Roundtable Forum, organised by the CIETAC during 6–7 November 2019, 47 arbitration institutions from within China and abroad signed the Beijing Joint Declaration of Belt and Road Arbitration Institutions, which was then supplemented by the Cooperation Mechanism of the Beijing Joint Declaration of Belt and Road Arbitration Institutions adopted during the 2021 China Arbitration Week (collectively, the Beijing Joint Declaration). Under the Beijing Joint Declaration, the undersigned institutions agreed to collaborate to establish a platform and mechanism for cooperation among different jurisdictions and legal traditions in various forms, including meetings, training, information exchanges and academic research, and to explore and promote innovation and development of a ‘one-stop’ dispute resolution service integrating arbitration, meditation and litigation.
The Supreme People’s Court is also attempting to establish an international commercial court system, with the aim of providing a ‘one-stop’ dispute resolution service, in which the China International Commercial Court of the Supreme People’s Court (CICC) will work with international commercial mediation and arbitration institutions to offer parties to international commercial disputes a choice between mediation, arbitration and litigation.
Following the Provisions of the Supreme People’s Court on Establishment of the International Commercial Court, in June 2018, the First International Commercial Court and the Second International Commercial Court of the Supreme People’s Court were inaugurated in Shenzhen and Xi’an respectively. In August 2018, the International Commercial Experts Committee of the Supreme People’s Court (ICEC) was formally established, comprising a broad range of legal experts and eminent jurists from around the world. In July 2021, the online service platform came into operation to enhance the function, and facilitate the use of, the CICC’s ‘one-stop’ dispute resolution service, the development of which was accelerated by the covid-19 pandemic.
The ICEC is entrusted by the CICC to mediate international commercial disputes on a voluntary basis. Further, five international arbitration institutions and two international mediation centres in China have been designated by the CICC to be the first group of participating institutions to broaden the avenues for parties to resolve their disputes with the aid and under the supervision of the CICC. Among other things, parties may choose to resolve their disputes through mediation or arbitration, and where the parties agree to submit the disputes to a designated international arbitration institution, they are entitled to apply to the CICC for interim measures, including measures of evidence preservation, property preservation and injunctions, before or after the arbitration commences, and to apply to the CICC to set aside or enforce the arbitral award rendered by the designated international arbitration institution.
On 12 September 2020, the United Nations Convention on International Settlement Agreements Resulting from Mediation entered into force. Together with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), these two conventions have laid the foundation for international dispute resolution by way of mediation and arbitration. On 2 July 2019, the text of the Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters was adopted at the 22nd Diplomatic Session of Hague Conference on Private International Law. Though not yet in force, the Convention promises to provide legal certainty and predictability as regards recognition and enforcement of foreign judgments in civil and commercial matters, which is of paramount importance for the resolution of international commercial disputes via litigation. These three international instruments will produce a favourable environment for cross-border enforcement of mediation, arbitration and litigation results, and are likely to help give full play to, and expand the international influence of, the ‘one-stop’ dispute resolution mechanism contemplated by the CICC.
