This article was initially published by China Law & Practice on the Edition of July/August 2016 and authored by Jianwei (Jerry) Fang and Zhengzheng Mai of Global Law Office.
As the Chinese legal system matures, PRC litigation is an increasingly viable option for commercial dispute resolution. At the same time, arbitration continues to evolve and play and important role.
Foreign arbitration institutions in China
According to PRC laws, foreign-related disputes can be submitted to a domestic or international institution according to the arbitration clause or agreement. Many foreign parties choose major global arbitration institutions to settle disputes with their Chinese counterparties. Popular forums include the International Chamber of Commerce (ICC), Singapore International Arbitration Center (SIAC) and Hong Kong International Arbitration Centre (HKIAC). China already takes up much of the caseload of these major institutions. 20% of the SIAC’s cases, for instance, are China-related.
Rep offices in Shanghai FTZ
The ICC, SAIC and HKIAC have been expanding their footprints in China. Between November 2015 and February 2016, all three had established representative offices in the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ). Although these offices cannot provide arbitration services to cases seated in mainland China, they allow for cooperation with local arbitrators and practitioners, and help promote global practices in the PRC.
Expansion of foreign-related disputes
Chinese law has historically drawn a line between “foreign-related” and domestic disputes. In practice, wholly foreign-owned enterprises (WFOEs) are considered Chinese legal entities. Foreign investors doing business in China through WFOEs or other types of foreign-invested enterprises (FIEs) are therefore often required to arbitrate in China, if the opposing parties are Chinese.
But there was a breakthrough recently. In the case of Siemens International Trading (Shanghai) Co., Ltd. v Shanghai Golden Landmark Co., Ltd., the Shanghai No.1 Intermediate People’s Court handed a landmark ruling by recognizing and enforcing an
SIAC arbitral award, although both parties to the dispute were WFOEs incorporated in the Shanghai FTZ. While this was not a typical “foreign-related” dispute, the court concluded that there was a sufficient degree of foreign element, as the source of registered capital and the parties’ ultimate ownership interests and decision makers were closely connected to foreign investors. Although the case has no stare decisis effect, it potentially allows Chinese parties—especially those based in the Shanghai FTZ—to opt for arbitration with international institutions outside mainland China.
Chinese arbitration institutions
The China International Economic and Trade Arbitration Commission (CIETAC), established in 1956, is China’s oldest and most experienced arbitration institution. Headquartered in Beijing, CIETAC has sub-commissions in Shanghai, Shenzhen, Tianjin, Chongqing, Hangzhou, Wuhan and Fuzhou, and also established the CIETAC Hong Kong Arbitration Center—its first branch outside the PRC.
The Shanghai International Economic and Trade Arbitration Commission (SHIAC) and South China International Economic and Trade Arbitration Commission (SCIA) were originally established in 1988 and 1983, respectively, and they absorbed the Shanghai and South China sub-commissions of CIETAC in 2013 and 2012, respectively.
The spin-off, absorption and re-organization of CIETAC, SHIAC and SCIA had caused much confusion and disruption to the arbitration practice in China. Fortunately, the Supreme People’s Court settled the jurisdictional dispute in July 2015.
In addition to CIETAC, SHIAC, and SCIA, there are around 180 regional arbitration commissions located in major cities, such as Beijing, Shanghai, Guangzhou, Wuhan, Hangzhou and Suzhou. In fact, many international investors have submitted cases to credible and reliable regional institutions, such as the Beijing Arbitration Commission (BAC).
Benefits of PRC arbitration
Compared with international arbitration, arbitration in China may be preferred for cases where the counterparty is located and has assets only in China. Needless to say, PRC arbitration may be more convenient from a logistics perspective. Although an arbitral award granted by an international forum could be recognized and enforced by Chinese courts (thanks to the New York Convention), it first needs to be authenticated and notarized, which could take months.
We have seen one extreme case involving a dispute submitted to an international arbitration institution, and although the arbitration clause clearly provided that any dispute arising out of the agreement shall be governed by the laws and regulations of the PRC, the counterparty raised various unmeritorious challenges regarding whether the PRC Arbitration Law or the Hong Kong Arbitration Ordinance (where the arbitration is seated) should be the governing law. The procedural dispute caused a delay of more than three months.
More importantly, it may be worthwhile to request preliminary injunctions, such as property or evidence preservation in China, which must be forwarded to and effected by the local courts. It will therefore be easier to request preliminary injunctions in PRC arbitration. Lastly, a Chinese institution could be better suited to grant an arbitral award with certain non-monetary obligations, given the complexity of Chinese laws, policies and requirements in different regions for enforcing such obligations.
A maturing method
While offshore arbitration will continue to be a valid choice for foreign parties and potentially for Shanghai FTZ-incorporated WFOEs in complex disputes, PRC arbitration is a suitable alternative for dispute resolution with Chinese counterparties, especially when they have operations and assets only in China. The domestic arbitration institutions will also continue to develop and expand their panels of foreign arbitrators, providing higher and more international standards of service to all parties involved.
