Free Trade Zones

New Chinese Arbitration Law Modernization Project – A Signal for Internationalization Instead of Decoupling?


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Background

The current Arbitration Law of the People’s Republic of China (the “Arbitration Law)” was enacted in 1994. With the exception of rather cosmetic changes made in 2009 and 2017, it has been in effect since 26 years almost unchanged. The law on arbitration has been gradually exposed to certain problems which have prevented it from meeting the practical needs of international arbitration. Despite the great popularity of arbitration among the Chinese and international business community, there is still a gap between the Chinese and the major international arbitration institutions. Some provisions of China’s current arbitration legal system do not conform to international standards. Among other things, the legal nature of arbitration institutions is unclear, disputes over the determination of the effectiveness of arbitration agreements can arise, and controversial cases and problems of judicial review of arbitral awards have arisen. In the opinion of the Chinese legislator, this has seriously hampered the process of internationalization and the development of arbitration in China. In this context, the fourth plenary session of the 18th CPC Central Committee proposed to improve the arbitration system and the credibility of arbitration. In 2019, the CPC Central Committee and the State Council issued opinions on improving the arbitration system and improving the credibility of arbitration, demanding that the arbitration law be revised.

New Arbitration Bill

On July 30, 2021, the Department of Justice released the Revised Arbitration (Draft for Comment) Law (the “Draft”) for public comment by August 29, 2021, which aims to improve the arbitration system and strengthen the credibility of arbitration by solving existing problems. in the current arbitration law. Among other things, the Project addresses:

1. Arbitration institutions abroad are authorized to set up branches

In 2015 and 2019, the relevant policies of the State Council had already enabled the establishment of branches of foreign arbitration institutions in the Beijing Free Trade Zone, Shanghai and several other places. In addition, the PRC Supreme People’s Court and other courts have sporadically recognized arbitration awards made by foreign arbitration institutions, with arbitration being held in China. Courts in the PRC have started to deviate from the strict application of Article 10 of the current Arbitration Law which only recognizes Chinese arbitration institutions to administer cases in China. The draft could further open the door to this practice as it reflects the rules of the free trade area and further allows foreign arbitration institutions to establish branches throughout the territory of the PRC and authorizes the Council State to formulate related measures for the management of the registration of arbitration institutions. However, it is too early to predict what the competencies of these branches will be and whether they will be granted real powers to administer the affairs.

2. The absence of agreement on an arbitration institution or an unclear agreement does not invalidate the arbitration agreement.

Article 16 of the current Arbitration Law states that an arbitration agreement is invalid if no explicit arbitration institution is selected. Furthermore, it does not expressly recognize the existence of foreign arbitration institutions. The restriction has been criticized by foreign investors for many years because it limits the parties’ choice of arbitration institutions or rules of procedure. This article is deleted from the Draft, which means that if there is no agreement on the arbitration institution, the arbitration agreement will still be valid. An approved arbitration institution is no longer a prerequisite for the validity of the agreement.

3. Adoption of the “seat of arbitration”

The draft no longer requires that a case be decided by an arbitration institution or an “arbitration commission”. It recognizes ad hoc awards rendered under the “seat of arbitration” standard, in accordance with the practice of international arbitration (with regard to ad hoc arbitration in general, see point 5 below. ). The seat of arbitration has a significant impact on international arbitration, closely linked to nationality, recognition and enforcement of arbitral awards. The revision would eliminate the previous quirk where awards made in mainland China under the auspices of a foreign arbitration institution were to be considered foreign awards under current arbitration law. It is to be expected that in the future they will be considered as PRC awards and may be enforced accordingly on the established basis of enforcement applicable to PRC awards.

4. Interim measures

The draft allows the arbitral tribunal to decide on interim measures, unlike the current Arbitration Law, which stipulates that the court has the exclusive right to grant interim measures and other injunctions. Under the draft, the parties can apply to the tribunal or arbitral tribunal for interim measures. Notwithstanding the foregoing, these interim measures will ultimately be executed by the courts endowed with their judicial power.

5. Limited recognition of ad hoc arbitration

Ad hoc arbitration is very popular in international arbitration as a method of settling disputes under a private agreement. Until now, due to China’s accession to the New York Convention, foreign ad hoc arbitration awards could be recognized and enforced in China, but domestic ad hoc arbitration was not allowed. Given the equal treatment of national and foreign arbitration, the Draft now recognizes ad hoc arbitration. However, arbitration matters are limited to “foreign-related commercial disputes”. This means that for domestic disputes, no ad hoc arbitration will always be recognized. Remarkably, this would lag behind the current legal situation in Chinese free trade zones that allow arbitration between foreign-invested enterprises in China and, therefore, for a subcategory of domestic disputes. According to the opinions of the Supreme People’s Court on the provision of judicial protection for the construction of free zones, when enterprises registered in the free zone have agreed among themselves to settle the relevant disputes by a specific arbitrator in accordance with the arbitration rules specific to a location in Mainland China, the arbitration agreement may be considered valid. To be at least as progressive as this free trade area regime, it is to be hoped that the draft will be further amended during the next review cycle.

6. Potential for Broadening the Scope of Arbitration In particular, investor-state and sports disputes had so far not been included in the scope of arbitration in China. These two areas are also not addressed in the draft, but mentioned in the official statement on the project from the PRC Ministry of Justice, stating that the coverage of investor-state and sports disputes should be facilitated by removing the previous restriction. of arbitration on “equal subjects”. The first article of the Draft indeed replaces “equal parts” by “natural persons, legal persons and other organizations”, which leaves possibilities for investor-State arbitration. However, the project does not reveal too much information about this speculation. It is still unclear whether the tribunal would recognize and enforce an arbitral award made in investor-state disputes. It can be inferred that the attitude of the Chinese government is to support domestic arbitration institutions in accepting investment arbitration cases after many arbitration institutions in China published their arbitration rules for investor-state arbitration in recent years. As the law with the highest hierarchy to regulate arbitration matters, it would be reasonable for the arbitration law to be amended to reflect this trend.

Gaps

The reformed mechanism of competence-competence still gives to the judicial service, the court in particular, the right to decide in last resort on the arbitrability of the case and the competence of an arbitral tribunal. A party can ask the intermediate tribunal to review an arbitration award on jurisdiction and arbitrability. In addition, ad hoc arbitration under the draft only applies to foreign affairs, which would create more incompatibilities of the enforcement system between domestic and foreign arbitration and lag behind the current statute. in free zones, as explained in point 5 of the previous paragraph. In addition, the Judicial Department has a filing requirement for ad hoc arbitration awards, including the status of a case and information about the award. The strict supervision of ad hoc arbitration can lead to unnecessary exposure of the parties’ information and their case, which is contrary to the principle of confidentiality of the arbitration.

conclusion and perspectives

The changes proposed in the draft, in particular the change allowing foreign arbitration institutions to set up branches (although on the basis of the current draft it is not clear whether these branches will be given real powers to administer cases. ) and the adoption of the concept of “seat of arbitration” are very positive signals to show that Chinese lawmakers intend to change the landscape of the arbitration environment in China, and to develop gradually. in a seat more favorable to international arbitrations. This would indeed be a signal for more internationalization rather than decoupling. If the project can be implemented with the aforementioned few suggestions for improvement and with the adoption of additional rules defining the details of the implementation of the changes, we expect that it will have a significant positive impact on the reputation of the China in the field of international arbitration. Meanwhile, the authorities are also working on other aspects to guide pending arbitration cases. The implementation of the project may take some time as some amendments are controversial. In addition, there could be a second draft requesting another round of notices. Or, if all goes well with this version, this draft will be submitted to the Standing Committee of the National People’s Congress for further discussion, which may take a few more months at best.

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