China: Commercial Dispute Resolution In China

Ince & Co Partner Peter Murray Contributed To The Chapter On "China," In Arbitration World 4th Edition

This article provides a summary of the China chapter, featured in Arbitration World 4th edition, part of The European Lawyer Ref Series, and discusses what options are available for arbitration, under what circumstances arbitration should take place in China, the advantages and disadvantages of arbitration in China, and how foreign courts' or arbitration tribunals' awards are enforced in China.

In summary

Arbitration in China

China has a relatively well-developed body of law in relation to arbitration, which is in most respects largely consistent with international practice. However, some gaps still exist between the letter of the law and its application.

• The oldest and most significant arbitration institution in China is the China International Economic and Trade Arbitration Commission (CIETAC), which predominantly hears international disputes. There is also the China Maritime Arbitration Commission (CMAC).
• Local arbitration commissions, designed to hear domestic arbitration cases (but also permitted to hear international disputes) are located in cities all across China.

Advantages of bringing an arbitration in China:

The importance attached to arbitration as a method for dispute resolution is reflected in the resources allocated to establish and maintain arbitration commissions all over the country.

• The establishment of an increasing number of mainland-based arbitration commissions in major cities, focussed on dealing with disputes with an international element.
• The relatively low cost of arbitration in China.
• The availability of interim measures, such as property preservation and advance ruling, in support of arbitration proceedings, as provided for in the PRC Civil Procedural Law, PRC Arbitration Law, CIETAC Rules and CMAC Rules.
• The approach of local courts to the enforcement of awards.

Disadvantage:

Although the law and regulations governing Chinese arbitration is in line with international arbitral principles, the practical implementation still requires further improvement.

General overview and developments

In China, arbitration and mediation offer an acceptable alternative in a society where the Confucian understanding of conflict resolution avoids the use of litigation because it is seen as disruptive to a harmonious society. The adversarial nature of litigation is viewed as an impediment to the very goal of business agreements, namely, mutual benefit and profit for the parties involved.

An on-going concern of 'home court advantage' and then in 1995 the introduction of the modern Arbitration Law (the '1995 Law') resulted in parties preferring arbitration as their best dispute resolution option. As a result, CIETAC has seen incredible growth in the number of cases it accepts, from 37 cases in 1985, to 1,230 cases in 2008 (of which 548 were international disputes).

Mediation

Chinese arbitral bodies routinely conduct mediation throughout the course of arbitration proceedings. However, under Chinese law, the tribunal cannot compel the parties to mediate and mediation is not a precondition to obtain an arbitration award. An arbitral tribunal may conduct a mediation with the agreement of the parties. However, where mediation fails, Chinese law requires that an arbitration award be made promptly. Where an agreement is reached through mediation, the arbitral tribunal can issue a legally binding written mediation document (Article 51) or the parties may simply withdraw from the arbitration.

In practice, it is the arbitral tribunal who will host the mediation. The mediation can help speed up the arbitration, reduce costs and maintain good relationships between the parties.

Ad hoc arbitration

Chinese law strongly discourages ad hoc arbitration. Article 16 requires a Chinese arbitration agreement to specify the particular arbitration commission chosen by the parties (e.g. CIETAC) for it to be valid, although foreign awards based on ad hoc arbitrations will be accepted.

This creates a situation in which the use of, for example, UNCITRAL arbitration rules (which were created specifically for ad hoc arbitrations) in Chinese arbitrations will result in a decision that may or may not have a legal basis under PRC law, and enforcement of the resulting award within China is likely to be challenged on the basis that the original arbitration agreement was invalid. In such a situation, it is quite foreseeable that the decision may be either to set aside or refuse enforcement under Article 58.

Principal laws and institutions

China's primary source of arbitration law is the 1995 Law. In addition, portions of PRC Civil Procedure Law 2007 (the 'Civil Procedure Law'), the Supreme Court's Interpretations of the Civil Procedure Law (1992) (having been revised accordingly following the modification of the Civil Procedure Law in 2007) and a number of other laws, rules, regulations and pronouncements are relevant to arbitration in China, including the following:

• CIETAC Rules.
• CMAC Rules.
• New York Convention.
• the ICSID Convention.

All arbitration commissions must be members of the China Arbitration Association, a self-regulating body that supervises the conduct of arbitration commissions and their arbitrators.

Referrals or applications in respect of the arbitration proceedings, such as a challenge to the tribunal's jurisdiction are be made to the intermediate people's court in China.

Supervision of arbitrators and their awards

Section II of the 1995 Law regulates the appointment of arbitrators.

Arbitration commissions must appoint 'fair and honest persons' as arbitrators, and all arbitrators must fulfill one of the following five conditions (Article 13):

• They have been engaged in arbitration work for at least eight years.
• They have worked as lawyers for at least eight years.
• They have been judges for at least eight years.
• They are engaged in legal research or teaching law in senior positions.
• They have legal knowledge and are engaged in professional work relating to economics and trade, and maintain senior positions or positions of equivalent professional level.

Beyond those explicitly stated in the law, additional provisions relating to the qualifications of arbitrators are also contained in the respective rules of each specific arbitration organisation. CIETAC and CMAC, in particular, have a large number of experienced professional arbitrators available.

In China, there is no requirement that an arbitrator needs to be a member of the Chinese Bar.

In China, an arbitral tribunal may be composed of one arbitrator or three arbitrators, with one being appointed as chief arbitrator. The Chinese arbitration commissions, including CIETAC and CMAC, have the authority to supervise the appointment of arbitrators by the parties. Parties cannot validly agree, by way of an ad hoc clause, that there will be no appointing authority.

Most arbitration commissions also have rules in relation to the impartiality and independence of their arbitrators. For example, CIETAC Rules call for appointed arbitrators who have a personal interest in the case to volunteer this information and step down.

Although they are technically civil institutions, many local arbitration commissions are reliant on various levels of government support for financing and personnel appointments.

Further, many judges at the district court level also act as arbitrators in local arbitration tribunals, which may affect the impartiality of the process.

Furthermore, each respective arbitration commission also has its own provisions governing the challenge or removal of arbitrators. CIETAC and CMAC have similar, but different, provisions in place for the challenge and replacement of an arbitrator with whom there exists justifiable doubt as to his or her impartiality or independence. Challenges directed at arbitrators based on impartiality are decided by the chairman of the arbitration commission.

Confidentiality of arbitration proceedings

Under Article 40, Chinese arbitration is confidential and Chinese arbitration hearings are conducted as closed hearings, except where the parties concerned agree to hold open sessions. Cases deemed to involve state secrets are not permitted to have open hearings.

Accordingly, all documents referred to or produced in the course of an arbitration are deemed confidential unless the parties agree otherwise.

In addition to Article 40, CIETAC Rules contain a more detailed restriction, stating that in a closed hearing of CIETAC, the disclosure to any outsiders about any substantive or procedural matters by the parties, their representatives, witnesses, interpreters, arbitrators, experts consulted by the arbitral tribunal, expert appraisers appointed by the arbitral tribunal and the relevant staff members of the CIETAC Secretariat is prohibited.

National courts and/or other authorities

Disputes that stem from foreign economic trade, transport or maritime activities in China and where the parties have a proper arbitration agreement in place may not be heard by the national court. Article 255 of the Civil Procedure Law makes it clear that in signing an arbitration agreement, the parties have in effect waived or surrendered their rights to bring an action in a court. Furthermore, Article 5 of the 1995 Law provides that where there exists an effective agreement to arbitrate and one party brings a suit in the People's Court, the court shall not accept the case unless the arbitration agreement is null and void. In this sense, there is legal backing for arbitration and the courts have been known to stay actions in favor of agreements to arbitrate.

Challenges to the validity of an arbitration agreement

If one party commences court proceedings without giving notice that there is an arbitration agreement, and the other party responds as the defendant, then the court will have jurisdiction over the case. However, if the defendant files a response purely to contest jurisdiction, on the basis that there is a valid arbitration agreement, that would not amount to a waiver of the right to arbitrate.

Where a party challenges the validity of an arbitration agreement, that party may request that either the arbitration commission decide on the validity of the agreement or that the appropriate court make such a decision. For cases involving foreign-related elements, the appropriate court to decide the validity of the arbitration agreement is the intermediate people's court at the place of domicile of the applicant or defendant or the intermediate people's court at the place of the agreed arbitration commission or where the arbitration agreement was made (Article 12 of the Supreme Court's Interpretations of the Application of the Arbitration Law of the People's Republic of China). Where one party has made such a request to an arbitration commission and another party has made the same request to a court, the court will decide the outcome of the application. Where a party wishes to challenge the validity of the arbitration agreement, that party must raise such a challenge before the arbitral tribunal begins the first hearing of the case (Article 20 of the 1995 Law).

Procedural flexibility and control

Although, in many cases, the rules of the various arbitration commissions allow for parties to use other agreed upon arbitration procedures, the key issue is that such procedures remain consistent with Chinese law. Notably, the UNCITRAL Arbitration Rules are generally in compliance with Chinese arbitration law and may be applied where the parties agree. Where alternative rules, such as the UNCITRAL Arbitration Rules, are not agreed within an arbitration agreement, the rules applied must be those of the nominated arbitration institution at the time of arbitration. Lack of agreement on arbitration rules will not prejudice an arbitration agreement or award under Chinese law.

The parties have the autonomy to decide whether to arbitrate or not, what to arbitrate, where to arbitrate, language and governing law. They can choose which Chinese arbitration commission will supervise the arbitration. The parties can also reach agreement on procedures such as hearings, evidence submission and statements in order to meet the particular requirements of each case. The parties can also decide to settle all or part of the claims, and discontinue the proceedings.

The place or seat of arbitration

Flexibility with regard to provisions governing the place of arbitration varies significantly among arbitration commissions. In many cases, where the parties agree, arbitration may be held in a place other than where the arbitration commission is located, although in such cases any associated costs must be borne by the parties. CIETAC Rules stipulate that arbitration hearings may be held anywhere, including in foreign countries. CIETAC arbitrations have taken place outside Mainland China, in Hong Kong, and could in the right circumstances be held in foreign countries.

There is no restriction on the choice of seat under Chinese law.

According to Article 18 of the 1995 Law, if the parties do not choose a seat in the arbitration clause, they are entitled to have a supplemental agreement stating the choice of seat. However, if the parties fail to reach an agreement on the choice of seat, the arbitration clause will be invalid.

Procedural powers and obligations under Chinese arbitration law

Once the tribunal is appointed, it enjoys the following powers according to Chinese arbitration law and with authorisation by the parties:

• To collect evidence.
• To hold a hearing.
• To mediate.
• To guide the arbitration procedures.
• To make a final award.

The award

A written arbitration award should state the arbitration request, the facts of the dispute, the reasons for the award, the result of the award, the arbitration expenses to be borne and the date of the arbitration. However, where both parties agree, the facts of the dispute and the reason for the award can be omitted from the arbitration award (Article 54 of the 1995 Law). The award must also be signed by the arbitrators and given the seal of the relevant arbitration commission, although the signatures of dissenting arbitrators are optional. According to Article 57 of the 1995 Law, the arbitral award takes legal effect upon its issuance.

Costs

Unlike Chinese court proceedings, where each party bears their own legal costs under most circumstances, according to the Charging Method of the Arbitration Commissions published by the State Council on 28 July 1995 (the '1995 Charging Method'), the costs of the arbitration should be borne by the unsuccessful party in whole or in part. The parties may reach an agreement as to the costs in the case of conciliation.

The parties can claim for legal costs in arbitration, but the tribunal has the discretion to decide the level recoverable and certain arbitration commissions will place a limit on the recoverable costs and expenses. For instance, CMAC Rules limit the amount of costs the winning party may recover to no more than 10 per cent of the award.

Arbitration agreements and jurisdictions

An arbitration agreement may be a clause in a contract or other written agreement (Article 16 of the 1995 Law).

The CIETAC Rules state that the arbitration agreement shall be made in written form, such as a written agreement, a letter, telegram, telex, facsimile, electronic data interchange or e-mail. In the course of exchanging the application for arbitration and written defence, if one party claims to have the arbitration agreement and the other party does not deny it, it shall be deemed that the written arbitration agreement exists.

Under the CMAC Rules, an arbitration agreement is deemed to be an arbitration clause stipulated by the parties in their contract, bill of lading, waybill, documents invoked or other written agreement concluded by the parties to submit their dispute for arbitration.

Validity of the arbitral clause

Under Chinese law, an arbitration agreement may stand on its own even if the rest of the contract in which it is embodied is deemed invalid.

Modification, rescission, termination or the declaration of a contract as invalid does not affect the validity of an arbitration agreement, and even where a contract has been concluded, but is not yet effective, the arbitration agreement is independently effective (Point 75, The Practical Questions and Answers Relating to Foreign-related Commercial and Maritime Trials and Article 19 of the 1995 Law).

Further, where a party challenges the validity of an arbitration agreement, that party may request that either the arbitration commission decide on the validity of the agreement or that the appropriate court make such a decision.

Furthermore, where one party has made such a request to an arbitration commission and another party has made the same request to a court, the court shall give a judgment. Where a party wishes to challenge the validity of the arbitration agreement, that party must raise such a challenge before the arbitral tribunal begins the first hearing of the case (Article 20 of the 1995 Law).

Choice of law

Chinese law gives effect to the choice of law by parties in the governing law clause of the contract.

If there is no choice of law, the procedural issues in the arbitration will be governed by the laws where the arbitration commission is located or where the arbitration is carried out. If the dispute is international, the arbitral tribunal will decide which substantive law to apply according to the Civil Procedure Law and the Application of Law for Foreign-related Civil Relations of PRC (2011).

Interim measures

Arbitration claims

Under Chinese law, only the court has the power to order interim relief measures.

Arbitration-related applications for interim relief granted by the courts, are limited to (1) preservation of property where if as the result of an act of the other party, or for some other reason, it appears that an award may be impossible or difficult to enforce; and (2) preservation of evidence, in the event that the evidence might be destroyed, or it may become difficult to obtain at a later stage.

The party who wishes to obtain such relief must apply to the relevant arbitration commission. The arbitration commission will in turn submit an application to the basic level court where the evidence/property is located.

If the arbitration is foreign-related, the arbitration commission will submit the party's application to the intermediate people's court located in the place where the person against whom the application is filed is domiciled or where the person's property is located (Article 256 of the Civil Procedure Law, Article 68 of the 1995 Law).

For non-maritime claims, parties can apply to a Chinese court for assets/evidence preservation only when there is an arbitration proceeding at a Chinese arbitral forum. For maritime claims, parties are able to apply for asset preservation and evidence preservation with a Chinese maritime court before and during a foreign arbitration proceeding, according to the Special Maritime Procedure Law. Preservation used to be limited to maritime assets, but these days Chinese maritime courts tend to expand the grant of such interim relief to non-maritime assets.

Challenging arbitration claims

Under Chinese arbitration law, an arbitration award is not subject to judicial appeal, however, the courts may supervise arbitration activities, refuse enforcement of an award and repeal or set aside awards independently of the arbitral tribunal.

Chinese arbitration law and the Civil Procedure Law refer to three types of arbitration awards: 'foreign', 'domestic' and 'foreign related.' The latter is a type of domestic arbitration that takes place in China but involves foreign elements.

Right of appeal or challenge

Arbitration awards are final and cannot be appealed or challenged in the local courts. Parties can, however, apply to set aside an award (see section 5.1.1 above) or to challenge the enforcement application. In relation to applications to set aside or challenge the enforcement of foreign-related awards, the procedures outlined in Articles 70 and 71 of the 1995 Law apply. However, the grounds are limited to those in Article 258 of the Civil Procedure Law.

While Article 56 of the 1995 Law allows parties 30 days after receiving the written award to request that the arbitral tribunal make corrections if there are any clerical or calculation errors in the written arbitration award or any award decision has been mistakenly left out of the written arbitration award. The 1995 Law does not include any provision that would allow a party to directly appeal an award.

The rules of the individual arbitration commission also contain differing provisions for the correction and modification of awards. For example, the CIETAC provisions allow 30 days from the date of the award for a party to apply in writing for a supplementary award on any claim or counterclaim which was advanced in the arbitration proceedings, but was omitted from the award. The arbitral tribunal may also make a supplementary award on its own initiative within a reasonable period of time after the issue of the arbitral award.

Is China a party to the New York Convention?

In 1986, China ratified the New York Convention with direct effect, and acceded to the Convention in April 1987. Under the principle of reciprocity, China limits the recognition of foreign arbitration awards to only those awards rendered in another New York Convention Contracting State (China signed this convention with a reciprocity reservation under Article I(3)) or in countries with which China has a bilateral treaty in respect of mutual recognition and enforcement of arbitration awards. The Chinese courts may refuse an application for enforcement on any of the grounds for non-enforcement contained in Article V of the New York Convention. However, if the court finds no grounds for refusal under the Convention, the court is, in theory, required to recognise and enforce the award.

There are special rules promulgated by the Supreme Court which deal with the mutual recognition of arbitrations from Taiwan (1998) and Hong Kong (2000).

Enforcing an award

Under the 1995 Law, a Chinese arbitration award is final, and neither a hearing on the merits nor an appeal is permissible. Accordingly, the court must enforce a Chinese arbitration award unless a party seeks to set aside the award, and the court finds applicable at least one of several grounds under Article 58 of the 1995 Law as stated in section 5.1.1.

On the other hand, a court may decline to enforce an award pursuant to Article 63 of the 1995 Law and Article 213 of the Civil Procedure Law. Under Article 213, a court may refuse to enforce an award, for example, if there is no written arbitration agreement; the award exceeded the scope of agreement of the arbitration agency's authority; the evidence is insufficient; certain procedural defects existed; the tribunal applied the law erroneously; an arbitrator committed malpractice, or it would contradict social or public interest. Further, Article 258 of the Civil Procedure Law, referenced in Articles 70 and 71 of the 1995 Law, specifies more circumstances under which a court may refuse to enforce a foreign-related arbitral award.

The time limit for the parties to apply for enforcement of an arbitral award to the court is two years. The parties should submit an application for enforcement in writing to the intermediate people's court where the person against whom the application for the enforcement is made has his or her domicile or where the property of the person is located. The court shall decide within seven days whether or not to accept an application for enforcement. And the court must issue 'a decision' within two months of receiving the application for recognition and enforcement of a Convention award. If the court decides to enforce the award, it must complete enforcement within six months from the time it makes its decision, unless there are 'special circumstances'.

To enforce a foreign award, the application should be submitted in writing to the intermediate people's court where the person against whom the application for the enforcement is domiciled or where the property of the person is located. The procedure of enforcement will be carried out in accordance to the New York Convention and the Civil Procedure Law.

If a party or any interested party considers that the enforcement is in violation of legal provisions, it may raise a written objection to the court in charge of the enforcement. If a party or any interested party raises a written objection, the court shall review the written objection within 15 days after receiving it. The court will then rule on whether the objection will be accepted or not. If a party or any interested party is not satisfied with the ruling, it may apply for reconsideration to the higher-level court within 10 days after the ruling is served (Article 202 of the Civil Procedure Law).

Rules for enforcement of 'domestic' and 'non-domestic' awards

Foreign awards

Under the principle of reciprocity, China limits the recognition of foreign arbitration awards only to those awards rendered in another New York Convention Contracting State or in countries with which China has a bilateral treaty in respect of mutual recognition and enforcement of arbitration awards. Foreign arbitration awards, including ad hoc arbitration awards of such countries, may be enforced in China.

As a precautionary measure, any intermediate people's court, which intends to refuse recognition and enforcement of a foreign arbitration award must refer the decision to a higher-level court for further examination.

Where the higher-level court also agrees that it is appropriate to refuse recognition and thus enforcement of an award, it must then report its opinion to the Supreme Court.

Domestic awards

If a party refuses to co-operate with the implementation of a domestic award against it, the opposing party may apply to the court for enforcement of the award.

The grounds for not enforcing purely domestic arbitration awards, include substantive grounds as well as procedural irregularities. The court may issue an award against the execution of an arbitration award where a collegiate bench of the court has determined that one of the following circumstances are found in the award of the arbitration commission:

• there is no arbitration agreement, either within the relevant contract or subsequently reached by the parties.
• the matter being adjudicated falls neither within the scope of the arbitration agreement, nor within the limits of the arbitration body's authority.
• where the composition of the arbitral tribunal or the arbitration procedure was not conducted in conformity with the rules of arbitration.
• evidence is found to be insufficient.
• the application of the law is found to be in error.
• the arbitrator is found to have taken bribes, conducted malpractice for personal considerations, or to have perverted the law in the course of arbitration.
• the verdict runs counter to society's public interests.

It is worth noting that the grounds for non-enforcement of foreign related domestic arbitration awards are slightly different and are limited to those based on the procedural irregularities listed in Article 258 of the Civil Procedure Law.

Foreign related-awards

Although foreign-related awards are domestic in that the arbitration takes place in China, the grounds for non-enforcement are solely procedural in nature, therefore providing a degree of extra protection to foreign-related awards. In the event that a foreign-related award involves foreign property, foreign courts will be asked to assist Chinese courts in accordance with the bilateral or multinational agreements on judicial assistance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.