United States: PRC Plans To Allow FTZ-Registered Foreign Arbitral Institutions To Lawfully Administer Arbitrations In Mainland China

On 6 August 2019, the State Council of the People’s Republic of China (the “PRC”) issued a plan for the New Lingang Area1 of the Shanghai Pilot Free Trade Zone (the “FTZ Plan”), which seeks to match standards in the New Lingang Area to those in other competitive free trade zones around the world.2 In a development that will be of great interest to arbitration practitioners and users, the FTZ Plan shows the Central Government’s intention to allow foreign arbitral institutions established in the New Lingang Area to register with the Judicial Administrative Department of the Shanghai Municipal People’s Government. The FTZ Plan suggests that, once registered, these institutions will be able to lawfully administer PRC-seated civil and commercial arbitrations and to refer applications for interim measures to the PRC People’s Courts. If implemented as described, these changes will dramatically impact the arbitration landscape in Mainland China and will be particularly welcome news to Wholly Foreign-Owned Enterprises (“WFOEs”) and Foreign Invested Entities (“FIEs”), which are at present generally required to arbitrate their disputes with other PRC entities in Mainland China.3 

Historical Exclusion of Foreign Arbitral Institutions

Historically, it has only been possible for domestic Chinese arbitration commissions to lawfully administer arbitrations seated in Mainland China. This is because Article 10 of the PRC Arbitration Law requires that arbitration commissions be registered with the judicial administrative department of a Chinese province, autonomous region or municipality directly under the Central Government. Furthermore, under Articles 28, 46 and 68 of the Arbitration Law, it is only possible for registered arbitration commissions to refer applications for interim measures to the PRC courts. As a practical matter, this limitation to “registered” commissions has meant that foreign arbitral institutions have not been able to administer PRC-seated arbitrations or refer applications for interim measures to the People’s Courts. 

The imposition of administration by local arbitration commissions—which use procedural rules influenced by Chinese court procedures—does not sit well with party autonomy or the desire to ensure a level playing field between parties from different countries. In part to ensure free choice of arbitral institution and procedural rules, non-PRC entities in cross-border contracts with PRC entities have overwhelmingly favored offshore arbitration (often in Hong Kong) administered by an international or regional arbitral institution. Because disputes between PRC domestic entities generally cannot be referred to offshore arbitration, this free choice of seat has been denied to WFOEs and FIEs in their contracts with other PRC legal entities. These entities have been required to submit to arbitration seated in Mainland China without a free choice of arbitral institution or procedural rules, to the frustration of foreign investors.  

Early Signs of Change

In recent years, there have been signs that the PRC courts were becoming increasingly receptive to administration by foreign institutions of arbitrations seated in China or involving only PRC legal entities. For example, on 25 March 2013, in Anhui Longlide Packing and Printing Co., Ltd. v.s. BP Agnati S.R.L., the Supreme People’s Court (the “SPC”) confirmed that an arbitration agreement providing for arbitration seated in China and administered by the International Chamber of Commerce was enforceable.4 In November 2015, the Shanghai First Intermediate People’s Court enforced an award resulting from a foreign-administered (and foreign-seated) arbitration in an exceptional case involving domestic entities registered in the Shanghai FTZ.5 Following these developments, in late 2015 and early 2016, the Hong Kong International Arbitration Centre (“HKIAC”), the International Chamber of Commerce and the Singapore International Arbitration Centre all established representative offices in the Shanghai FTZ for communication, liaison and marketing purposes.

The PRC courts have also shown a willingness to receive applications for interim measures from foreign arbitral institutions. There were reports between 2014 and 2018 of isolated instances of courts in Guangdong Province receiving and granting applications for interim measures referred by HKIAC and CIETAC Hong Kong Arbitration Center.6 Then, on 2 April 2019, the SPC and the Hong Kong Department of Justice signed the “Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of Mainland China and of the Hong Kong Special Administrative Region,” which (once implemented) will permit parties to Hong Kong-seated arbitrations administered by designated arbitral institutions with offices in Hong Kong to obtain interim measures from the People’s Courts, including preservation of property, preservation of evidence and preservation of conduct (mandatory injunction). This arrangement is awaiting implementation.

Announcement of the FTZ Plan

The State Council released the FTZ Plan on 6 August 2019.  Article 4 of the FTZ Plan shows that the Central Government intends to allow all reputable foreign arbitral institutions to establish in the New Lingang Area and register with the Judicial Administrative Department of the Shanghai Municipal People’s Government. The FTZ Plan suggests that, once registered, the institutions will qualify as registered arbitration commissions within the meaning of Article 10 of the Arbitration Law and be able to lawfully administer PRC-seated civil and commercial arbitrations in the fields of international business, maritime affairs, investment, etc., and to refer applications for interim measures (such as preservation of property, preservation of evidence and preservation of conduct) to the People’s Courts. The FTZ Plan does not state any requirement of a “foreign element.”

Article 4 of the FTZ Plan sets out what “will” be permissible; it remains to be seen when corresponding legislation or regulations will be adopted to put the planned arrangements into effect. If implemented as described, these changes will constitute a sea change in the PRC arbitration landscape and end the effective monopoly that has been enjoyed by domestic PRC commissions to date. The changes will allow users a freer choice of arbitral institution and procedural rules for PRC-seated arbitration and enhance Mainland China’s profile as a seat of arbitration. These changes will be particularly welcome news to WFOEs and FIEs, which are at present generally required to arbitrate their disputes with other PRC entities in Mainland China.

* The authors are grateful to trainee solicitor Keyon Lo for his research and drafting assistance.

Footnotes

1 The New Lingang Area is located south of the Dazhi River, east of Jinhui Port and south of Xiaoyangshan Island and Pudong International Airport in Shanghai.

2 “China issues overall plan for new area of Shanghai FTZ issued by the State Council,” 6 August 2019, http://english.www.gov.cn/policies/latestreleases/201908/06/content_WS5d493336c6d0c6695ff7e4aa.html.

3 There is no express provision under PRC law prohibiting submission of domestic disputes to arbitration administered by non-Chinese arbitral institutions. However, PRC courts have interpreted Article 271 of the PRC Civil Procedure Law and Article 128 of the PRC Contract Law (which permit submission of foreign-related disputes to foreign arbitral institutions) as prohibiting submission of domestic disputes to arbitration administered by foreign arbitral institutions. See, e.g., Reply of the PRC Supreme People’s Court for the Instructions Requested by the Beijing Higher People’s Court re Beijing Chaoyang Sports and Leisure Company’s Request for Recognition and Enforcement of a Korean Commercial Arbitration Board Award (2013) Min Si Ta Zi No. 64.

4 Reply of the Supreme People’s Court regarding the Dispute on the Validity of an Arbitration Agreement between Anhui Longlide Packing and Printing Co., Ltd. and BP Agnati S.R.L. (2013) Min Si Ta Zi No.13, 25 March 2013.

5 Siemens International Trading (Shanghai) Co., Ltd v.s. Shanghai Golden Landmark Co., Ltd (2013) Hu Yi Zhong Min Ren (Wai Zhong) Zi No. 2, 27 November 2015.

6 See, e.g., Helen H. Shi, “Have PRC Courts Ordered Interim Relief Measures in Support of HKIAC Arbitrations without an Express Legal Basis: What Lies Ahead?”, Kluwer Arbitration Blog, August 26 2018, http://arbitrationblog.kluwerarbitration.com/2018/08/26/have-prc-courts-ordered-interim-relief-measures-in-support-of-hkiac-arbitrations-without-an-express-legal-basis-what-lies-ahead/.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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