AS cross-border transactions and direct foreign investment increase, foreign companies have been continuing to use arbitration as a favored option for dispute resolution in China for complicated, bilingual and big-ticket commercial cases. The China International Economic and Trade Arbitration Commission (CIETAC) is the long-standing and leading arbitration institution in China to handle foreign-related cases with a caseload of 1,352 filings in 2010. In response to this growing demand for arbitration, China has taken significant steps to improve its arbitration system. In October 2010, China promulgated the Law on Application of Laws to Foreign-related Civil Relations (the Law). Meanwhile, CIETAC is also in the process of adopting a set of new rules to replace the current rules of 2005 that are expected to come out around the year end (the New Rules). This article is to share with the readers these and other new developments of international arbitration in China.
The Law is implemented to systemize the rules governing application of laws to foreign-related civil relations in China. As a result, the Law also has an effect on international arbitration in China.
1. Governing Law on Arbitral Agreement
Article 18 of the Law provides that: [T]he parties concerned may agree upon the laws governing an arbitral agreement, failing which the laws of the domicile of the arbitral institution or laws of the place of arbitration shall apply.
The Law enshrines the notion of party autonomy in determining applicable law on an arbitral agreement. Meanwhile, the Law also makes it clear on how to determine the governing law on an arbitral agreement in the absence of agreement by the parties. The law of the domicile of the arbitration institution or the law of the place of arbitration will be taken into consideration, as they are sometimes not the same.
2. Ascertainment of Foreign Laws
Article 10 of the Law provides that: [F]oreign laws governing foreign-related civil relations shall be ascertained by the peoples court, arbitration institution or administrative organ. The party choosing a foreign law as the governing law shall provide the law of the foreign country. If the foreign law cannot be ascertained or there are no respective provisions in the law of that foreign country, the law of the Peoples Republic of China shall apply.
The Law lays down the general rule that a foreign law that governs foreign-related arbitration shall be ascertained by an arbitration institution. If a party chooses a foreign law as the governing law, it has the obligation to provide such a law. The Law clarifies the rules regarding the ascertainment of foreign laws under different circumstances.
NEW CIETAC RULES
CIETAC started to amend its rules since late 2009. The contemplated New Rules are expected to incorporate many of the practices in modern arbitration and to address specific procedural issues that are faced by CIETAC. Although the draft of the New Rules is yet to be finalized, some of the proposed new changes are said to include the follows:
1. Governing Law on Arbitral Agreement
In compliance with Article 18 of the Law, the New Rules will provide the option that the parties may choose the governing law on the validity of an arbitral agreement.
2. Nationality of Presiding and Sole Arbitrators
Where the presiding or sole arbitrator shall be appointed by the Chairman of CIETAC, the New Rules require that the Chairman in making an appointment shall take into consideration the nationalities of the candidates based on the circumstances of a particular case. This new change adds transparency and neutrality to the arbitration proceedings when parties of different nationalities fail to jointly agree upon the presiding or sole arbitrator.
3. Consolidation of Cases
For efficiency and cost saving, the New Rules will allow the tribunal to consolidate two or more pending cases into one single proceeding if the cases are substantially similar.
4. Rules of Other Arbitration Institutions
The current rules provide that where the parties have agreed on the application of other arbitration rules, the parties agreement shall prevail except where such agreement is inoperative or in conflict with a mandatory provision of the law of the place of arbitration. Such a provision faces some practical difficulties when the application of other arbitration rules is in conflict with CIETAC rules. The New Rules make it clear that CIETAC will fulfill its administrative duties for other arbitration institutions when other arbitration rules are used. It may be seen as a sign that CIETAC will be more open to using the rules of other arbitration institutions.
5. Summary Proceedings
Under the current rules, summary proceedings will be used in a case where the amount in dispute does not exceed RMB 500,000. Due to the increase of amount in dispute in many cases, the New Rules will raise the threshold to RMB 2,000,000. It is contemplated that a large number of cases will be handled through summary proceedings after the New Rules are adopted.
It is generally expected that the implementation of the Law and New Rules will further systemize and modernize international arbitration in China. Meanwhile, it is observed that the unfailing support from the Chinese court has also played an important role in safeguarding the development of international arbitration in China.
1. Few Rejections by Chinese Courts
Prior to 2000, comparatively few foreign arbitral awards were filed with Chinese courts for recognition and enforcement. Since 2000, the number of filings has been continuously increasing. A majority of foreign or foreign-related arbitral awards have been successfully recognized and enforced in Chinese courts. Statistics show that there have been only 23 applications that were rejected by Chinese courts since 2000; most rejections were made on the basis of violation of due process under the New York Convention.
2. Pre-reporting System
Under Chinese law, to recognize and enforce a foreign arbitral award, a foreign company should go to a competent Chinese court at the intermediate level. If the court thinks that the foreign arbitral award will not be recognized and enforced, under the current prereporting system, the court is required to report to the higher court. Should the higher court concur with the intermediate court on the rejection, it must report to the Supreme Peoples Court for final review. Under this pre-reporting mandate, the Supreme Peoples Court is in a good position to monitor all the potential rejections of applications for recognition of foreign arbitral awards in the courts all over the country. The system has effectively established a centralized reporting and review mechanism. It has maintained the uniformity and conformity of the judicial review. At the same time, it has also effectively minimized local protectionism that is one of the main concerns to many foreign companies and lawyers.
3. Cautious Use of Public Policy Reservation
Some foreign companies have questions on how the public policy reservation in the New York Convention is used by the Chinese judiciary. Statistics shows that among the 23 rejections in the past ten years, there is only one case where the Chinese court used public policy violation. It is generally observed that Chinese courts have been extremely cautious in using the public policy reservation when determining whether to recognize a foreign arbitral award.
The Law and New Rules codify the existing practice in many important areas, while adding a number of innovative features intended to address the growing complexity of todays arbitration and demands for efficiency and cost-effectiveness. These new changes as well as the past achievements imply that China is striving to integrate its arbitration system and keeps pace with the international standards. In response to these new changes, this article also offers a salutary reminder to companies and their legal counsel of the importance of amending China-related arbitral agreements in light of the Law and New Rules. Please note that this article is unable to address all changes made in the Law and New Rules. If you wish to discuss any of the issues outlined above, please contact the writer for more details.
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