AS CHINA’S GOVERNMENT AND ARBITRAL INSTITUTIONS MAKE INTENSIVE EFFORTS TO INTERNATIONALIZE DOMESTIC PRACTICES, THE QUESTION NOW IS HOW THIS PROCESS SHOULD BE DEFINED. LUO WEITENG REPORTS

As a method for resolving disputes between parties quickly and in private, arbitration has been widely adopted across multiple areas in the international arena. It is highly regarded for its efficient and confidential nature, as well as the fact that the decision of the arbitral tribunal is final.

With China’s re-emergence as a major global economic power, many ambitious domestic arbitration bodies are racing to spearhead the international development track of Chinese arbitration. This has ignited an industry-wide discussion in the “going global” journey of Chinese arbitration.

On 5 July 2019, the Seventh Session of the Beijing Arbitration Commission (BAC), also known as Beijing International Arbitration Centre, deliberated and adopted the revised Beijing Arbitration Commission Arbitration Rules and its annexes concerning fee schedules, effective from 1 September 2019.

Dong Chungang, a Beijing-based partner at Jingtian & Gongcheng, says BAC’s new arbitration rules make pioneering amendments including the amount in dispute applicable under ordinary procedures, single arbitration under multiple contracts, the emergency arbitrator procedure, procedural management of arbitration cases, and a new fee schedule. Among them, the biggest bright spot is the groundbreaking reform on the existing fee schedule to bring it in line with international standards.

Zhang Shouzhi, a partner at King & Wood Mallesons in Beijing, says the new arbitration rules replace the combination of “case acceptance fees plus case handling fees”, long adopted by domestic arbitration bodies, with the internationally adopted model of “arbitrator’s fees plus administration fees”. Arbitrators are also allowed to have their fees charged on an hourly basis by agreement of the parties. This essentially marks a significant step towards aligning Chinese arbitral practice with international norms.

Before that, similar trailblazing rules promulgated by domestic arbitral institutions had already made their debut. Cao Lijun, a partner at the Beijing office of Zhong Lun Law Firm, says that back in 2015, the China International Economic and Trade Arbitration Commission (CIETAC) had already distinguished between the institution’s administrative charges and the arbitrator’s fees in its arbitration fee schedule III (applicable to arbitration cases administered by the CIETAC Hong Kong Arbitration Centre) under CIETAC’s arbitration rules.

Besides, the BAC’s new arbitration rules apply equally to both domestic and international arbitrations, removing any differentiation between the fees applicable. “This not only marks the integration of domestic arbitration fee structure with international practices, but also reflects the BAC’s straightforward attitude to phasing out the differentiate treatment of domestic and international arbitrations,” says Zhou Yan, a Beijing-based partner at Tian Yuan Law Firm.

“Food and fodder should go ahead of troops and horses,” adds Dong, from Jingtian & Gongcheng. “Generally, reforms on fee structure and financial systems are the premise and foundation of other reforms. On the basis of the ever-deepening reforms, China is likely to see a team of professional arbitrators come into being. International arbitrators will also be more likely to work in China.

“With the revision of China’s Arbitration Law, and the business operation of international arbitration bodies in China, Chinese arbitration will probably make concrete progress and achieve leapfrog development, moving in line with international standards in a more proactive manner.”

Chen Luming, a partner at JunHe based in its Shanghai office, says the BAC’s new arbitration rules and subsequent practices will also set an example for other domestic arbitral institutions. “If the new rules could be widely recognized, accepted and adopted, it would lead to a benign competition,” he says. “Other arbitral institutions will follow suit or even go an extra mile to improve their rules so as not to lose their competitive edge. This is an evolution of rules that the arbitration community is glad to see.”

Vincent Mu Di, a Shanghai-based partner at Llinks Law Offices, says the BAC’s new arbitration rules “clarify the relationships
between arbitral tribunal and arbitral institution, as well as arbitral tribunal and parties to arbitration. This leads to a clear division of work, making sure that everyone performs its own duty.”

Rapid growth

Under the combined influence of global and domestic factors, international commercial arbitration has become one of the significant methods of resolving increasingly frequent international trade frictions and cross-border commercial disputes.

“Cross-border dispute resolution always goes along with types of cases and economic cycle to manifest itself prominently during a certain period of time,” says David Gu Jia, a partner of cross-border disputes and international arbitration practice in the Beijing office of Tiantong & Partners.

As China presses ahead with existing national policy to improve its infrastructural level from “made in China” to “intelligent manufacturing in China”, David Gu says more and more domestic companies will wrestle with EU and US multinationals to vie for international market share in the future. Cross-border commercial disputes revolving around intellectual property and global trade will spring up, with the battle for 5G supremacy being the living embodiment of the ongoing conflict.

The internet is also a conflict-prone area. “As digital dividends show signs of drying up, the new-type internet companies in China, represented by the e-payment and live-streaming platforms, are setting out on adventures overseas,” he says. “As they beef up their presence in new markets, competition is unavoidable. This will probably give rise to an awful lot of commercial disputes.”

Zhang Shouzhi, from King & Wood Mallesons, agrees, “The development of the internet not only brings changes to business models, but also endows the internet industry-related disputes with new characteristics. Take internet finance as an example. Its cyberspace-based and mass-base nature, which sets it apart from traditional finance, leads to a stronger demand to resolve relevant disputes in a low-cost, highly effective and convenient manner. Arbitration is likely to become the primary choice for settling internet finance-related disputes.”

Meanwhile, Zhang Shouzhi says emerging online arbitration may satisfy the demand from the internet finance-based disputes to a certain extent by capitalizing on its advantages, in terms of resolving high-volume disputes and standardized evidence integration. “However, how to link it with the existing arbitration regime and keep the execution costs under control needs to be explored further,” he says. “The future development of online arbitration and arbitration of internet finance-related disputes deserves attention.”

Gu Zhuowei, managing partner and risk officer of the management committee at B&D Law Firm’s Beijing office, says: “In the past one to two years, construction and real estate are the sectors where the number of international commercial arbitration cases has been on a tear, and should be closely watched.”

According to the Civil Procedure Law, Gu Zhuowei says that a lawsuit initiated for real estate or construction should be under the jurisdiction of the people’s court in the place where the estate or the construction project is located. This restricts parties’ freedom of choice as to a location for dispute resolution.

Such a restriction could be broken, however, if both parties clearly specify in the agreement that the lawsuit shall be under the jurisdiction of the arbitral institution; Moreover, both parties can freely choose people with industry-specific know-how as arbitrators to have the lawsuit settled in a more efficient and convenient manner. Therefore, more and more enterprises or parties will opt for arbitration to resolve the disputes.

“Due to the fact that the international political and economic scenes are fraught with turbulence and uncertainty, the overall economic conditions last year were far from positive,” notes Zhang Zheng, a senior partner at the Beijing office of Dentons. “Particularly, the government ramped up efforts to rectify the financial order, giving rise to an outburst of crisis in the red-hot areas of investment and financing including funds, private equity investment and trusts. This eventually led to a remarkable increase of disputes involving valuation adjustment mechanisms (VAMs), share repurchases, and performance compensation clauses. Likewise, arbitration as a form of dispute resolution in this field should be closely watched and explored further.”

Zhang Zheng, from Dentons, says that VAM agreements signed between investors and original shareholders are basically deemed valid. However, some disputable issues remain as to whether a target company should assume joint and several liability, and whether an investor’s claims based on share repurchase and performance compensation clauses could be both supported by the court.

“Further discussion is needed as to whether new breakthroughs will be made in the future, and whether more advanced ideas can be integrated with commercial arbitration for the resolution of investment disputes of this kind to balance the interests of all stakeholders in an even better fashion,” he says.

Zhang Shouzhi, from King & Wood Mallesons, says: “Predictably, disputes involving the Belt and Road projects, including investment disputes between Chinese ‘going global’ companies and host states’ governments, will be on a steady rise. The relevant proceedings, entities, arbitral awards and enforcement regarding investment arbitration will be the emphasis of future research in the area of dispute resolution.”

Cao, from Zhong Lun, says that in recent years Chinese investors have made active use of the investor-state dispute settlement (ISDS) mechanism to protect their lawful rights and interests. The central government has also proactively responded to investment arbitration cases initiated by foreign investors. Currently, the International Centre for Settlement of Investment Disputes (ICSID) is handling a couple of cases initiated by Chinese investors as the claimant, and several more cases with the central government as the respondent.

“Recently the United Nations Commission on International Trade Law [UNCITRAL] is mulling over a reform on the ISDS mechanism,” says Cao. “The Chinese government is playing a proactive part in the initiative, with its submission of the Recommendations of China regarding investor-state dispute settlement reform.

“Issues of concern include whether the introduction of the new ISDS mechanism will replace the Convention on International Trade in Endangered Species of Wild Fauna and Flora (the Washington Convention), whether an appellate body in the realm of ISDS awards will be established, and whether a new treaty governing the enforcement of awards of the investment arbitration will be unveiled.”

The choice of arbitral seat

One of the questions frequently asked by parties in Asia-related international arbitration is: What’s the difference between fixing Hong Kong or Singapore as the seat of arbitration? Previously, despite all kinds of comparisons, no substantial difference was actually found between the two jurisdictions. However, such a situation changed dramatically, as Hong Kong’s Securities and Futures Commission (SFC) and Department of Justice inked 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 (HKSAR) in April this year.

“From a technical perspective, such an arrangement builds a bridge between Chinese mainland and Hong Kong in terms of mutual applications and enforcement of interim measures in aid of arbitral proceedings,” says Chen, from JunHe. “While parties to a Hong Kong-seated arbitration are allowed to apply to the mainland courts for property, asset or conduct preservation orders, parties to arbitral proceedings in mainland China can also file an application for injunctions or other interim measures to the Hong Kong High Court. This will grant judicial remedies to parties in both jurisdictions.”

Chen says the arrangement sharpens Hong Kong’s edge as a centre for international arbitration. For the first time, mainland China has signed an arrangement concerning interim measures in aid of arbitral proceedings with another jurisdiction. “In other words, Hong Kong is the one and only jurisdiction on a world scale whose judiciary is connected with that of mainland China, which opens the channel of cross-jurisdictional pre-arbitration preservation,” says Chen. “Such a comparative advantage makes Singapore and Hong Kong’s major rivalry in their quest to be an international arbitration hub pale in comparison. If Singapore is unable to establish the same channel with mainland China in the future, it will likely have to brace for the loss of some international arbitration cases.”

Chen says that if the pair of international treaties signed by China – the Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters, and the United Nations Convention on International Settlement Agreements Resulting from Mediation (the Singapore Convention) – could have most global economies entered into, as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) did. Then, “international dispute resolution will switch itself progressively from the previous arbitration-led model to a new model driven by the co-ordination of arbitration, litigation and mediation”.

“Despite whether such a pattern may lead to the partial loss of international arbitration cases, in the long run it is undoubtedly conducive to the development of international dispute resolution,” says Chen. “The integration of arbitration, litigation and mediation will provide added flexibility to international dispute resolution, enabling parties to select the appropriate method based on their demand and features of disputes after weighing the pros and cons of the three forms of dispute resolution.”

As the internationalization of Chinese arbitration becomes a point of focus in the new era, in fact, leading international arbitration bodies represented by the Hong Kong International Arbitration Centre (HKIAC), the Singapore International Arbitration Centre (SIAC) and the International Chamber of Commerce (ICC) made inroads into China’s arbitration market back in 2015.

Recently, China’s State Council issued the Framework Plan for the New Lingang Area of the China (Shanghai) Pilot Free Trade Zone, allowing reputable foreign arbitration and dispute resolution institutions to administer arbitrations and develop arbitration business in the new Lingang area. This opens the door wider for competition.

The introduction of the BAC’s new arbitration rules to bring the revised fee structure in line with international norms is a move that goes with the trend. Besides the BAC, CIETAC also actively promotes the internationalization of Chinese arbitration, setting up its arbitration centres outside mainland China, in Hong Kong, North America and Europe, in succession.

In September 2017, the CIETAC Investment Arbitration Rules (For Trial Implementation) were launched, filling a void in China’s investment arbitration rules.

Chen, from JunHe, says: “The internationalization of Chinese arbitration means aligning the China-seated arbitral proceedings with highly effective international norms in a more active fashion to make up an existing deficiency of Chinese arbitration and thus boost its competitiveness.” Specifically, the internationalization of Chinese arbitration encompasses three parts: The internationalization of arbitration law; arbitration rules; and arbitration talent.

To what extent the arbitration rules and talent can evolve and yield a breakthrough directly hinges on the provision of arbitration law. “Only by removing the chains and handcuffs from arbitration law, can we truly ease the existing restrictions on arbitration practices to make Chinese arbitration keep up with the pace of international development,” says Chen, from JunHe.

Cao agrees. “The existing Arbitration Law in China was promulgated in 1994, without modelling itself on the UNCITRAL Model Law on International Commercial Arbitration, and also failing to clearly define some key concepts related to arbitration including the nationality of an award and the seat of arbitration,” he says.

Zhou, from Tian Yuan Law Office, says that in September last year, the Standing Committee of the 13th National People’s Congress incorporated the revision of Arbitration Law into the “2nd Level Project” of its future legislation plan. This indicates that Chinese arbitration is getting on the right development track.

David Gu, from Tiantong & Partners, says: “Nowadays, China’s arbitration community has reached a consensus that what the current arbitration law needs is not some fine-tuning, but the radical structural restatement and big technical adjustment. Personally, I suggest pressing ahead with the overhaul in a double-track approach.”

He says that a double-track approach would take hundreds of domestic arbitral institutions incapable of dealing with foreign-related arbitration cases in large numbers into account, allowing them to stay in the current arbitration mechanism without making adjustments too quickly. The ultimate goal is to upgrade and transform the arbitration law in a comprehensive way, making sure that a fixed set of laws in accordance with international standards applies to every city under the jurisdiction of China as a seat of arbitration.

David Gu says that allowing international arbitration bodies to conditionally set up operations in China’s market will also significantly increase the frequency of Chinese being used as the arbitration language. “A massive amount of arbitration practices exercised in such an environment will in turn be exported to the Belt and Road route for dispute resolution, as a big push for the promotion and popularization of Chinese law as the applicable law, and Chinese as the arbitration language on an international scene, thus extending the international influence of China’s dispute resolution practitioners,” he says. “I think such a top-level design is extremely visionary and far-reaching.”

On the international arbitration scene, currently dominated by the Anglo-American legal systems, he says that the practical community of Chinese arbitration should have their voice heard. “On the one hand, we should preserve some good procedural features of the civil and commercial arbitral proceedings in a civil law regime step-by-step, and then ‘export’ them to international arbitration by the way of practice, essentially shouldering the historical responsibility as a civil law jurisdiction of promoting the procedural features of international arbitration in a civil law regime.

“As a civilized nation whose thousands of years of history forms a splendid cultural tradition of Confucianism, China should keep alive its cultural heritage of valuing harmony and recognizing the importance of mediation in the field of international arbitration.”