The Shanghai Municipal Bureau of Justice recently released the Administrative Measures for Business Offices Established by Overseas Arbitration Institutions in Lin-Gang Special Area of China (Shanghai) Pilot Free Trade Zone (the "Measures") (official Chinese text available here).
The new Measures will come into force on 1 January 2020 and are valid for three years until 31 December 2022 (Article 25).
Under the Measures, qualifying overseas arbitral institutions will be allowed to set up offices in the Lin-Gang Free Trade Zone (Shanghai) and can administer foreign-related arbitration (as stipulated under the PRC law) with respect to civil and commercial disputes arising in the fields of international commercial, maritime, and investment affairs (Article 14).
The Shanghai Municipal Bureau of Justice is the designated authority to accept and approve the foreign institutions' application for registration. Pursuant to Article 8 of the Measures, a business office of an oversea arbitral institution can be set up in China as early as March 2020.
The Measures have attracted much interest and attention since its conception, and the newly released text sheds light on this exciting new development in China's continuing efforts to become more international arbitration friendly, and to establish itself as a more attractive seat for dispute resolution.
It was only on 1 October 2019 that the 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 came into effect – empowering a Mainland Chinese court to grant interim measures in aid of a Hong Kong seated arbitration administered by one of the approved arbitral institutions (see previous alert memo here). We understand that five applications for interim measures before the Chinese courts have already been made, with one being successful and the others pending.
These are a series of game changers for China-related arbitration, and will allow for more options for foreign arbitration users.
The arbitral market in Mainland China is regarded as a closed shop for foreign arbitral institutions in two ways.
First, it is unclear whether foreign arbitral institutions, such as the International Chamber of Commerce ("ICC") and the Hong Kong International Arbitration Centre ("HKIAC") can administer arbitrations seated on the Mainland. The concern is whether they are an "arbitral commission" within the meaning of the PRC Arbitration Law.1 However, there have been instances where parties have referred to a foreign arbitral institution seated on the Mainland. The Measures clarify the qualifying foreign arbitral institutions that are permitted to administer foreign-related arbitrations in the Lin-Gang Pilot Free Trade Zone.
Second, parties cannot arbitrate outside Mainland China unless there is a foreign element in the dispute.2 This includes seating the arbitration in Hong Kong, and choosing institutions based in Hong Kong such as the ICC and HKIAC. The Chinese courts have denied enforcement of arbitral awards issued by foreign arbitration institutions seated outside the Mainland between two PRC legal entities without any foreign related elements.3
However, there have been some recent cases which suggest that the Mainland Chinese market for foreign arbitral institutions is opening up.
In Anhui Longlide Packaging Co. Ltd. v. BP Agnati S.R.L.("Longlide")4, the Supreme People's Court held that an arbitration agreement providing for ICC arbitration seated in China was valid. After Longlide, the HKIAC, ICC, and the Singapore International Arbitration Centre ("SIAC") all established representative offices in the Shanghai Pilot Free Trade Zone for marketing and promotional services.
The Shanghai No.1 Intermediate People's Court in Siemens International Trading (Shanghai) Co., Ltd v. Shanghai Golden Landmark Co., Ltd5enforced a foreign arbitral award even though the SIAC award involved two PRC entities.
The Measures are another important step towards the opening of the market for foreign arbitral institutions in Mainland China. This can only be positive for users of arbitration as foreign investment in China continues to be at high levels and more companies are doing business with Chinese counterparties.
1Article 10 and Article 66 of the PRC Arbitration Law require that arbitral institutions in China be established by the departments and chambers of commerce of the People's Municipal Governments, or in the case of foreign-related arbitral institutions, by the Chinese Chamber of International Commerce.
2The SPC's Interpretations provide that a dispute is "foreign-related" when (i) one or more parties are foreign citizens or legal entities; (ii) the subject matter is located outside China; (iii) the facts which create, modify or terminate the legal relationship occurred outside China; (iv) the habitual residence of one or more parties is located outside China; or (v) other circumstances that can be considered as foreign-related.
3See for e.g. Jiangsu Aerospace Wanyuan Wind Power Co., Ltd v LM Wind Power (Tianjin) Co (2012) Min Si Te Zi No.2 and Beijing Chaolaixinsheng Sports and Leisure Co Ltd v Beijing Suowangzhixin Investment Consulting Co Ltd (2013) Er Zhong Min Te Zi No.10670.