New developments in commercial arbitration and mediation

By Fan Kun, McGill University
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The recent developments on arbitration in China made me think about questions I raised in my book, Arbitration in China: A Legal and Cultural Analysis, published with Hart in 2013. How will new economic players such as China react to the movement of harmonization of international arbitration? With the harmonization of the law and practice of arbitration worldwide, is China showing signs of adapting to the current trend of international arbitration? Will Chinese legal culture influence the evolution of international arbitration?

My answers to the questions remain affirmative: adaptations in both directions are taking place. On the one hand, China is making adaptations to bring its practice more in line with international standards. On the other hand, China is bringing innovations that may influence the practice elsewhere. These developments also come at an important time, with China launching an ambitious program of economic expansion, the Belt and Road Initiative (BRI), and approaching a leading role in the world’s economy.

Important role of SPC

SPC interpretations. Although judicial interpretations do not carry the force of national laws under the constitution, they play a crucial role in practice. They not only interpret or clarify, but also supplement national laws, particularly where an area is changing rapidly and the national legislation is not equipped to deal with new issues that have emerged.

After the Arbitration Law came into force, the Supreme People’s Court issued a number of judicial interpretations concerning the application of relevant laws and treaties by Chinese courts. In practice, the court’s judicial interpretations provide important guidance for lower courts on the application of the Arbitration Law and also fill interpretative gaps not addressed. Since May 2017, the court successively promulgated a series of judicial interpretations and documents, which marks another major milestone in the development of arbitration in China. These interpretations and documents, to some extent, plug the deficiency gaps in the Arbitration Law and the courts’ interpretation on its application.

Guiding cases. An interesting phenomenon is China’s recently established Guiding Cases System and its potential impact on arbitration. Though the majority view among legal scholars is that guiding cases are not legally binding on lower courts, “this does not exclude the possibility that guiding cases are factually binding on lower courts, i.e., court decisions will be overturned by a higher level court if decisions do not properly take account of guiding cases” (Björn Ahl, “Retaining Judicial Professionalism: The New Case Guiding Mechanism of the Supreme People’s Court”, pp. 121-139). It has been reported that “guiding cases have been applied as sources of substantive rules in a number of arbitral proceedings” (Mark Jia, “Chinese Common Law? Guiding Cases and Judicial Reform, 129 Harvard Law Review 2213 (2016), p. 2226). It remains to be seen what impact guiding cases may have on arbitrators’ decision-making when arbitrating in China or when Chinese law is applicable to the merits of a dispute.

Belt and Road and CICCs

Another interesting development to be highlighted is China’s ambitious BRI, which has the potential to reshape the global socio-economic landscape. One core feature of the BRI is the emphasis on the rule of law, including efforts to develop an effective dispute resolution mechanism, which suits the needs of the BRI projects. In this context, it is worth noticing the recent establishment of the two China International Commercial Courts (CICCs), which are examples of two-way adaptations.

On the one hand, the CICCs’ establishment follows an interesting development worldwide: the emergence of “international” commercial courts created within a domestic legal system to resolve cross-border commercial matters, such as the Singapore International Commercial Court (SICC).

On the other hand, the CICCs also demonstrate a Chinese innovation by establishing a comprehensive multiplex dispute resolution mechanism, allowing the parties to choose between mediation, arbitration and litigation.

The “one-stop” dispute resolution mechanism established by the CICCs could better facilitate the interconnection between mediation, arbitration and litigation, and thus enable a fair, efficient and convenient resolution of international commercial disputes in the context of the BRI.

Mediation of disputes

This interesting development is the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) Investment Agreement, signed on 28 June 2017, which chooses mediation as the means of dispute settlement for investor-state disputes. This is in line with a recent trend in investor-state dispute settlements (ISDS). The integration of mediation into an ISDS system is becoming more frequently reflected in the IIAs, and that there is a move from a simple mentioning of mediation in the cooling off period in the arbitration proceedings, to singling out mediation as an alternative to arbitration and, to the more recent initiative, which incorporates comprehensive rules of investor-state mediation (ISM).

Mediation presents a credible and compelling option for both investors and states to settle disputes arising from investment activities. Investor-state arbitration is becoming more confrontational, lengthier and costlier, and more judicialized. The final result may be unsatisfying, even to the winning party. So, the issue of increased use of mediation for the ISDS is not whether, but, rather, how it is applied.

The mediation clauses contained in the CEPA Investment Agreement have specific and conducive language about ISM and may offer an example of “how” to encourage the use of mediation to resolve the investor-state disputes.

Adaptations of China

Chinese adaptations towards international standards. China has made rigorous legal reforms to bring its arbitration law and practice in line with transnational standards. From an economic perspective, such adaptations come as no surprise. Arbitration is a service industry, evolving as part of the competition within the “law market”.

Parties that desire arbitration can choose the applicable law, the seat of arbitration, and the arbitration institutions in their contract. In order to attract international commerce, states endeavour to implement arbitration-friendly laws and to commit courts to enforce arbitration agreements and the resulting arbitral awards. Arbitration institutions now compete worldwide for the business of resolving international commercial disputes by modernizing their arbitration rules, hiring professional arbitrators, and organizing arbitration seminars and conferences to promote their services. Other professional organizations (such as the ICCA or ITA) organize various kinds of arbitration conferences and provide professional training for arbitration practitioners to familiarize them with the rules of the game. An increasing number of educational institutions have developed courses on international commercial arbitration or even a specialized master’s programme, which also plays a role in forging the shared norms of the arbitration community. As a result, we can see in today’s setting that different types of arbitration may converge to form a common culture in the international community.

Globalized localism: Chinese innovations. A dynamic of “selective adaptations” is taking place in China, with some examples of Chinese innovations and potential influence of the Chinese practice on the evolution of dispute resolution mechanisms elsewhere, which we can call “globalized localism”.

One example of this Chinese innovation is the “one-stop” diversified international commercial dispute settlement mechanism established by the CICCs. This flexible approach and diversified dispute resolution mechanism is in line with the general evolution of dispute resolution mechanisms in the constant switch between “formalism” and “informalism”. Arbitration was developed in reaction to the excessive formalism of the courts. As a result of parties’ constant demand for new procedural rights, arbitration is now criticized as having become too expensive, too slow, too proceduralized and judicialized, and more similar to court procedures.

This excessive formalization of arbitration will inevitably lead to the development of new forms of dispute resolution (which may include combinations of different methods), featured by informalism, deproceduralization and flexibility, focusing more on the parties’ interests and re-establishing peace between them rather than sending them home with a winner and a loser. The Chinese approach of a diversified dispute settlement mechanism is people-orientated, relationship-focused and tempered with flexibility. It appears to be in line with the trend of the legal evolution, and may indeed be a point of convergence where the East meets the West.

Fan Kun is an associate professor at McGill University. This article is taken from her speech on the BAC/BIAC’s 2019 Toronto Summit on Commercial Dispute Resolution in China. BAC/BIAC’s senior counsel, Lu Yang, also contributed to the article