(By Fan Kun, ICC International Court of Arbitration Bulletin)

III. Legal obstacles

To better understand the peculiarities of Chinese arbitration practice highlighted above, it is necessary to look at the social, economic and political context in which it is set. In so doing, we will enquire into the main obstacles faced by arbitration under China’s current legal regime.

A. Gaps and ambiguous provisions in current legislation

Although the enactment of the Arbitration Law marked a great improvement in China’s arbitration system, current legislation still contains ambiguous provisions and gaps that remain unaddressed. Firstly, many provisions in the Arbitration Law are too simple and vague, and give no clear guidance on how they are to be applied. For instance, Article 61 of the Arbitration Law establishes a re-arbitration system by providing generally that ‘if, after accepting an application for setting aside an arbitral award, the People’s Court considers that the case may be re-arbitrated by the arbitral tribunal, it shall notify the tribunal that it shall rearbitrate the case within a certain time limit and shall rule to stay the setting-aside procedure. If the arbitral tribunal refuses to re-arbitrate the case, the People’s Court shall rule to resume the setting-aside procedure’, without stipulating specifically how the re-arbitration system should be applied in practice. The SPC Interpretation 2006 has since clarified the circumstances in which the court may exercise its power in this connection, and has permitted applications for setting aside the new awards made in the re-arbitration proceedings. However, silence continues to reign on several critical issues, such as the scope of the re-arbitration, the time limit for the re-arbitration, and whether a new tribunal should be formed in the re-arbitration proceedings. There is a danger that the lack of clear legislative guidance may lead to inconsistent practices amongst the courts.

In addition, there are inconsistencies between the Arbitration Law and the Civil Procedure Law, which require clarification. The Civil Procedure Law was promulgated in 1991, prior to the establishment of a formal arbitration system in China. By the time the Arbitration Law came into force in 1995, arbitration in China had significantly improved, but several references were still made back to the Civil Procedure Law. Such references create inconsistencies that the Arbitration Law fails to address. For example, concerning the enforcement of international awards, Article 71 of the Arbitration Law refers only to paragraph 1 of Article 260 of the Civil Procedure Law, which causes uncertainty as to whether ‘social and public interest’ as provided in paragraph 2 of Article 260 can be used as a ground for refusing to enforce an international award. There is a similar uncertainty over the enforcement of domestic awards, as Article 63 of the Arbitration Law refers only to paragraph 2 of Article 217 of the Civil Procedure Law, whereas the ‘social and public interest’ ground is provided for in paragraph 3 of Article 217. The new Civil Procedure Law, which was promulgated on 28 October 2007 and came into force on 1 April 2008, does not resolve these uncertainties.

B. Administrative interference in arbitration practice

At institutional level, arbitration suffers from persisting administrative intervention. Although the Arbitration Law attempts to establish an independent system of arbitration institutions to protect party autonomy from interference by administrative authorities, arbitration remains largely under institutional control rather than subject to party autonomy, due to the predominance of institutions in the Chinese legal system. As a result, the arbitration system has become tainted in the following respects : (i) arbitration institutions largely rely upon government support for their establishment, and some local arbitration institutions are established by local government ‘for administrative needs, rather than the market demand for dispute resolution’; (ii) the government retains strong financial control over arbitration institutions even after they have been established: all the income they receive is considered to be a State asset and must be submitted to the government, which decides on its distribution according to the reported expenditures; and (iii) most of the leading positions in arbitration institutions are held by government officials.

C. Lack of party autonomy

The absence of a free economy and a legal tradition in private law has meant that party autonomy is traditionally foreign to Chinese minds. Although the Arbitration Law sets forth party autonomy as one of the basic principles for the development of arbitration in China, there are still restrictions on parties’ choices, which derive from the procedural rules of the courts.

1. Lack of flexibility in the arbitration procedure

Many international treaties and national laws give parties considerable freedom to determine their own procedural rules. For instance, Article 19(1) of the UNCITRAL Model Law on International Commercial Arbitration provides that: ‘Subject to the provisions of this Law, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.’ The aspects of the procedure that the parties are free to determine include the place of arbitration, the language to be used, the date of commencement of arbitral proceedings, and the manner in which evidence will be presented. In contrast, the Arbitration Law lays down a number of rigid requirements for arbitration proceedings. Article 45, for example, requires that ‘the evidence shall be presented during the hearings’. This provision overlooks the fact that arbitrations may be conducted without a hearing and denies the parties the right to specify at what stage of the proceedings certain evidence will be presented, as happens in international practice.

2. Strict requirement for a valid arbitration agreement

At international level, a liberal view is generally taken towards the validity of an arbitration agreement. What matters is that the parties’ intention to submit to arbitration is clear. For instance, Article 7(1) of the UNCITRAL Model Law on International Commercial Arbitration states that an arbitration agreement is ‘an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not’. In contrast, three specific requirements must be met for an arbitration agreement to be valid in China. Article 16 of the Arbitration Law provides that an arbitration agreement must include: (1) the expression of the parties’ wish to submit to arbitration; (2) the matters to be arbitrated; and (3) the arbitration institutions selected by the parties. Article 18 of the Arbitration Law further provides that if the parties fail to designate an arbitration institution in the arbitration agreement, or if such designation is unclear, the arbitration agreement will be considered invalid, unless the parties reach a supplementary agreement.

Read together, Articles 16 and 18 of the Arbitration Law may be thought to imply that the designation of an arbitration institution actually constitutes a compulsory requirement for a valid arbitration agreement. These conditions go far beyond the parties’ mere consent to arbitrate and make arbitration agreements vulnerable to invalidation by the courts. Moreover, they have a number of practical consequences, as described below.

i) Exclusion of ad hoc arbitration

Article 16(3) of the Arbitration Law is generally read as excluding the possibility of ad hoc arbitrations in China. This provision reflects the Chinese government’s belief that institutional arbitration should be the only acceptable type in China since it allows the government to monitor arbitral institutions and cases conveniently. The reluctance by Chinese legislators to recognize ad hoc arbitration reflects the fear that if arbitration is allowed to be conducted without supervision by an established administrative body, it would be difficult to control the behaviour of arbitrators and to ensure the quality of arbitration, and the government would remain ignorant about ad hoc arbitrations unless a party initiated court proceedings. They believe that it is still too early to introduce ad hoc arbitration, which presupposes a system of trust that has not yet fully developed in China. China’s socio-political system has however changed significantly since the days when its arbitration system was first established. Ad hoc arbitration, which has been practiced around the world for several centuries, offers a fast, cost-effective and above all flexible alternative to institutional arbitration. If practised in China, ad hoc arbitration could encourage arbitration institutions to improve their service and enhance China’s appeal as a venue for arbitration by offering parties more freedom and greater flexibility.

ii) Unclear status of foreign arbitration institutions

Articles 16 and 18 of the Arbitration Law also leave the status of foreign arbitration institutions unclear. As a recent study has pointed out, these provisions amount in reality to a ‘Great Wall’ barring foreign arbitration institutions, on account of the protectionism that informs the interpretation of these provisions by the Chinese courts, especially where pathological arbitration agreements are involved. Although the Arbitration Law does not expressly state that the arbitration institutions to which it refers may not be foreign, the attitude of the People’s Court suggests that it would not recognize an award rendered in an arbitration seated in China but administered by a foreign arbitration institution.

In the famous case Zublin International GmbH v. Wuxi Woco-Tongyong Rubber Engineering Co. Ltd, the Supreme People’s Court decided on 8 July 2004, in answer to the Higher People’s Court of Jiangsu, that an arbitration clause providing for ‘arbitration: ICC Rules, Shanghai shall apply’ was invalid under the laws of the People’s Republic of China. The reason it gave for its decision was that the arbitration clause did not explicitly designate an arbitration institution and was therefore deemed to be invalid under Article 16 of the Arbitration Law.

To avert this risk, ICC took the step of recommending that ‘it would in any case be prudent for parties wishing to have an ICC arbitration in Mainland China to include in their arbitration clause an explicit reference to the ICC Court of Arbitration’. Accordingly, the Chinese version of ICC’s standard arbitration clause was amended to include a specific reference to the ICC International Court of Arbitration, which reads as follows: ‘All disputes arising out of or in connection with the present contract shall be submitted to the International Court of Arbitration of the International Chamber of Commerce and shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.’ The SPC Interpretation 2006 has since clarified that the lack of an express reference to an arbitration institution does not automatically invalidate the arbitration clause if the arbitration institution can be ascertained on the basis of the rules. As far as ICC is concerned, its Rules of Arbitration contain ample references to the administration of arbitrations by the International Court of Arbitration, the arbitration body attached to ICC. The question that remains is whether foreign arbitration institutions such as ICC may

qualify as an ‘arbitration institution’ within the meaning of Article 16 of the Arbitration Law.

Some recent ICC awards have confirmed the validity of arbitration agreements providing for ICC arbitration with a seat in Mainland China, but it has yet to be seen whether such awards will be successfully enforced in the Chinese courts. Further assurances in the law regarding the status of foreign institutions administering arbitrations seated in China would be helpful and would remove any remaining doubts over the enforcement of awards rendered in such arbitrations.

iii) Limitation on the appointment of arbitrators

In China, the parties’ freedom of choice is limited when it comes to choosing arbitrators. Article 13 of the Arbitration Law requires each arbitration institution to draw up a panel of arbitrators by profession. This requirement is generally seen as creating a compulsory panel system in China. At the present time there are more than 185 arbitration institutions in China, each of which maintains its own list of arbitrators. Only those persons whose names appear on the list of a given institution are eligible to be appointed as arbitrator by that institution. Thus, an arbitrator on CIETAC’s list cannot be appointed in an arbitration administered by the Beijing Arbitration Commission (unless also on the latter’s list).

Parties expecting the greatest possible freedom in their choice of arbitrators will remain unsatisfied, for the panel system cannot provide expertise in all technical fields nor cover all nationalities. CIETAC has tried to give parties greater freedom in its latest arbitration rules by allowing them to choose arbitrators outside CIETAC’s panel list, subject to confirmation by CIETAC’s Chairman. This loosening of the panel system is expected to increase the pool of foreigners available to serve on CIETAC tribunals. However, the tendency so far has been to continue appointing arbitrators from CIETAC’s panel list. The appointment of the chairman of the arbitral tribunal has drawn comment from foreign observers. Previous versions of the CIETAC rules gave the CIETAC Chairman the fallback power of appointing the presiding arbitrator if no agreement was reached by the parties. The chairman of the arbitral tribunal so appointed would very likely be Chinese. If the Chinese party had already appointed a Chinese arbitrator (which is usually the case), two of the three arbitrators would be Chinese, giving at least an appearance of imbalance within the arbitral tribunal.

CIETAC’s 2005 rules limit its role in selecting the chairman of the tribunal by allowing each party to provide a list of candidates for the position. CIETAC makes a choice only if there is no candidate common to the lists provided by the parties. This novel approach is expected to ‘help deflect persistent criticisms that CIETAC’s role in the selection of the chairman under the 2000 Rules allowed it to “stack” tribunal membership in favour of Chinese nationals’. The main reason given by CIETAC for its reluctance to appoint foreign arbitrators was the concern that the remuneration offered would be too low to make such appointments attractive to foreign arbitrators. This handicap will hopefully be overcome in due course with the increase of arbitrators’ remuneration, which in turn presupposes financial reform in Chinese arbitration institutions, so as to ensure, for instance, their financial independence vis-à-vis government control.

IV. Reforms and prospects

Arbitration in China has already undergone various reforms, in response to the concerns and criticisms expressed by foreign investors and legal experts. These changes demonstrate the will of Chinese government officials to bring Chinese arbitration more in line with international standards. Through regulations and notices, the Supreme People’s Court has sought to address the lingering issues that are at odds with international standards. Although not part of the law, its interpretations of the law play an important role in practice, particularly in areas where the law is changing rapidly and existing law is not equipped to deal with new issues that have emerged. Since the adoption of the Arbitration Law in 1994, the Supreme People’s Court has made numerous pronouncements to guide lower courts in their application of the Arbitration Law, including with regard to such issues as jurisdiction over interim measures, the handling of jurisdictional challenges, and the setting aside and enforcement of awards. The SPC Interpretation 2006 represents China’s latest effort to bring both the law and practice of arbitration more closely in line with commonly accepted international norms.

Arbitration institutions also play an essential role in improving arbitration practice in China. As the leading arbitration institution in China, CIETAC’s efforts serve as a driving force for institutional reform. CIETAC regularly reviews and revises its arbitration rules, so as keep them in line with modern international standards. The most recent revision, dating from 2005, contains many positive innovations, including less stringent panel requirements, the power of arbitral tribunals to decide on their own jurisdiction upon CIETAC’s delegation, the list system for selecting the chairman of an arbitral tribunal, the freedom of parties to choose the seat of the arbitration and the place of the hearing, and the discretion given to arbitral tribunals to decide whether to take an inquisitorial or an adversarial approach. Although institutional rules do not have the force of law, they certainly help to promote the practice of arbitration, facilitate the legislative process and further the process of adaptation.

At local level, the reforms undertaken by the Beijing Arbitration Commission are impressive. As far as financial resources are concerned, the Beijing Arbitration Commission is self-sufficient, maintaining its facilities through its own arbitration fees without the need for government support. It is thus able to make independent financial decisions, free from the intervention of the Beijing People’s Government. As far as technology is concerned, it is equipped with sophisticated case-management software, enabling its staff to handle the cases more efficiently and to provide a better service. It has also recently inaugurated stand-alone mediation rules and revised its arbitration rules, both of which came into force on 1 April 2008. The initiatives of the Beijing Arbitration Commission might indeed inspire local arbitration institutions across the country.

References to foreign arbitration institutions in contracts relating to China are becoming increasingly frequent, as illustrated by the statistics of the ICC International Court of Arbitration. In 2006, China (including Hong Kong) for the first time headed the list of most frequently represented nationalities in ICC arbitration in South and East Asia. In 2007, the new cases filed with the ICC Court involved 27 parties from Mainland China, which accounts for 11.58% of the parties in South and East Asia and is double the number of parties from Mainland China ten years ago.

In recognition of the growth of international trade and arbitration in China and in order to meet the needs of local users of ICC arbitration, ICC has opened a branch of the Secretariat of its International Court of Arbitration in Hong Kong, staffed with a new case management team. This initiative is intended to facilitate the conduct of ICC arbitration in China and in the Asia-Pacific region more generally. The emergence of foreign arbitration institutions in the Chinese market is likely to increase competition for local arbitration institutions, but such pressure may be a strong incentive for Chinese arbitration to become more efficient. However, greater clarification is needed in China to ensure safe and open access to international arbitration administered by international institutions such as ICC, and to facilitate the enforcement of awards. Further reforms are needed to strengthen the independence of arbitration institutions, bring legislation closer to international standards, and allow fuller expression to party autonomy.

(Edited by: China West Lawyer)