Clarity needed on foreign arbitration institutions in China

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The recent Arbitration Week was another success for arbitration in Hong Kong, with events put on not only by Hong Kong’s own arbitral institutions, but also by other institutions such as the Permanent Court of Arbitration and the International Chamber of Commerce (ICC), and also by a distinctly Chinese institution, the Chinese International Economic and Trade Commission (CIETAC).

DD_leadpicIn all, it has been a tumultuous year for arbitration in China. Following CIETAC’s introduction of its new rules in 2012, the dramatic rift between CIETAC’s Beijing headquarters and CIETAC’s Shanghai and Shenzhen sub-commissions dominated headlines in the legal world.

Although this rift has caused much uncertainty, a possible positive consequence is that there is now greater competition between CIETAC Beijing and CIETAC Shenzhen (now renamed SCIA or SCIETAC) and CIETAC Shanghai (now renamed SHIAC or SIETAC). Greater competition leads to higher standards. We have already seen beneficial competition between CIETAC and other Chinese arbitration institutions such as the Beijing Arbitration Commission.

Unambiguously allowing foreign arbitration institutions to conduct arbitrations in China would further increase competition, leading to a higher quality of arbitration in China.

The current ambiguity

There has been lingering uncertainty about whether foreign arbitration institutions can carry out arbitrations in China. The traditional view is that only Chinese arbitration institutions may conduct arbitrations in the country. Article 16 of the Arbitration Law, which is the legislation that governs arbitration in China, provides that an arbitration agreement must specify an arbitration commission.

Ostensibly, the purpose of this article is to exclude ad hoc arbitration, which is indeed not permitted for arbitrations in China. However, most legal practitioners have also taken this to mean that the arbitration commission specified must be Chinese – although this is not expressly stated – since other provisions of the Arbitration Law refer only to Chinese arbitration commissions.

This ambiguity about whether foreign arbitration institutions can engage in arbitrations seated in China was highlighted by a decision of the Ningbo Intermediate People’s Court in 2009, which apparently allowed the enforcement of an ICC award seated in China, seemingly challenging the prevailing view.

However, the reasoning for this decision was problematic. The court held that the award was enforceable because it was “non-domestic”, since it was an ICC award. Therefore, in the court’s opinion, so long as there were no grounds for refusing enforcement under the New York Convention, the award could be enforced.

Many commentators have questioned whether this reasoning was correct and whether the award should have been classified as “non-domestic”.

The need for clarity

In light of this continuing ambiguity, it is time for China to unambiguously allow non-Chinese institutions to conduct arbitrations within China.

By doing so, parties choosing to use foreign arbitration institutions in China will no longer run the risk of finding out that their award is unenforceable, perhaps after a lengthy and costly arbitration.

More significantly, the influx of competition from foreign arbitration institutions will only raise the quality of arbitration in China.

There are of course a number of benefits of allowing foreign arbitration institutions to conduct arbitrations in China:

  • Greater competition, higher standards. By allowing well established and experienced arbitration institutions such as the ICC, London Court of International Arbitration, Hong Kong International Arbitration Centre and Singapore International Arbitration Centre to arbitrate in China, CIETAC will be competing with not just other Chinese arbitration institutions, but also foreign ones. Quality thrives on competition, and a greater degree of competition will motivate Chinese arbitration institutions to keep up with the cutting edge of developments.
  • Brings China in line with the arbitration framework in other countries. China is unusual in not allowing ad hoc arbitration, as well as not clearly permitting foreign arbitration institutions to conduct arbitrations within its territory. Eliminating these restrictions would bring China more in line with other major arbitration centres in the world such as London, Paris, Hong Kong or Singapore.
  • Levelling the playing field. In September 2012, CIETAC set up an office in Hong Kong, its first office outside of mainland China. As Chinese arbitration institutions become increasingly internationalised, the logical next step would be to also allow foreign arbitration institutions to arbitrate in China.

Establishing with certainty that foreign arbitration institutions can conduct arbitrations in China would expose CIETAC and other Chinese arbitration institutions to greater competition, encouraging them to keep up with the highest standards of arbitration in the world, and to become leading arbitration institutions themselves.

Chinese arbitrators will also gain more experience and sophistication, as foreign arbitration institutions may also appoint Chinese arbitrators.

Overall, if parties know that when they choose to arbitrate in China, they have the option to choose from a vast array of foreign arbitration institutions, as well as improved, up-to-date Chinese arbitration institutions, this will be a great incentive for parties to choose China as the place for arbitration in future.

The author, Lord Goldsmith QC, is chair of European and Asian litigation at Debevoise & Plimpton