International aviation arbitration to take flight after Shanghai pact

On 28 August 2014, the China Air Transport Association (CATA), the International Air Transport Association (IATA) and the Shanghai International Arbitration Centre (SHIAC) jointly executed the Strategic Co-operation Agreement on International Aviation Arbitration in Shanghai.

Pursuant to the agreement, the three parties will share aviation expertise and resources, and co-operate in the establishment of the Shanghai International Aviation Court of Arbitration, and also the Shanghai International Expert Committee on Aviation Arbitration. The court will be the world’s first arbitration institution to specialise in the resolution of aviation disputes and the committee will focus its efforts on assisting the court in formulating specialised and international arbitration rules, recommending professional aviation arbitrators, promoting international aviation arbitration and carrying out relevant academic research.

The establishment of the tripartite co-operation signifies that China, the world’s second-ranked aviation power in terms of total civil air transport turnover since 2005, has finally turned its sights towards international aviation arbitration.

Two outstanding features

There are two features particular to international aviation arbitration. First, a lot of international aviation arbitration is ad hoc arbitration. Based on trade practice, disputes relating to air transport are usually governed by the IATA arbitration rules, with either party to the dispute applying to the IATA for ad hoc arbitration. Although the ad hoc arbitration system is widely applied internationally, Chinese law has not confirmed the lawfulness of ad hoc arbitration conducted in China.

Accordingly, when a dispute arises between a Chinese company – usually a product or service provider – and a foreign company – usually a foreign airline company – the parties face two difficulties. On the one hand, the foreign company will often have little confidence in the judicial environment in China and favour instituting a legal action abroad, or, relying on its advantageous position, attempt to convince the Chinese company to go for ad hoc arbitration abroad.

But even if it is successful in obtaining a judgment or arbitration award abroad, the foreign company is not familiar with the procedure for applying for enforcement in China. On the other hand, the Chinese company usually lacks experience in international legal actions or arbitration, and worries about the high costs and lawyers’ fees for resolving disputes abroad. Under such circumstances, finding a normalised dispute resolution method that is acceptable to both parties is of pressing practical significance to China’s international aviation industry.

Second, international aviation arbitration is quite technical and specialised. Commercial activities relating to air transport involve the airline company, airport and supplier, and the technical aspects and specialisation of the air transport industry require arbitrators who resolve air transport disputes to have the corresponding professional knowledge and familiarity with air transport industry practice. However, the relative paucity of aviation law-oriented experts on the lists of arbitrators of domestic arbitration institutions makes it difficult to satisfy the demands of air carriers.

Rapid growth

China’s air transport industry has grown rapidly in recent years and the air transport disputes involving Chinese companies have likewise increased from year to year, making the demand in China for an institution to resolve international air transport disputes particularly pressing.

The establishment of the court will go a long way to resolving this problem – SHIAC, as a Chinese international arbitration institution with a good reputation and extensive experience, has the capacity to provide quality arbitration services, while the other two co-operating parties (CATA and IATA) can ensure that the technical aspects and specialisation in the aviation sector are addressed. The co-operation among the three institutions can concentrate industry resources and professional strengths to provide relatively professional and mature arbitration services to parties involved in international air transport disputes.

Court faces challenges

While having bright growth prospects, the court also faces challenges. First, as compared to the ad hoc arbitration customarily used in aviation disputes, the disadvantage of institutional arbitration lies in the lack of flexibility in the procedural rules. For example, many arbitration institutions do not permit the parties to a dispute to select a person not on their list of arbitrators to serve as an arbitrator, and in the investigation of the facts and admission of evidence, institutional arbitration puts greater emphasis on the provisions of the arbitration rules rather than what the parties have agreed upon.

Accordingly, if the court wishes to change the industry practice formed by air carriers and compete with ad hoc arbitration, it must, in formulating its arbitration rules, extract the advantages of both institutional arbitration and ad hoc arbitration; for example, it could accord parties greater freedom in terms of arbitrator selection and rules of evidence.

Second, how to ensure effective enforcement of arbitration interim measures and arbitration awards are issues that all Chinese arbitration institutions, including the court, face. The court can learn from the experience of the Shanghai Free Trade Zone (FTZ) Court of Arbitration. When pressed by the FTZ Court of Arbitration, the Second Intermediate People’s Court of Shanghai Municipality issued the Several Opinions on the Judicial Review and Enforcement of Arbitration Cases Governed by the Arbitration Rules of the China (Shanghai) Pilot Free Trade Zone on 4 May 2014, which formulate detailed and practicable provisions for arbitration interim measures, enforcement of arbitration awards, etc.

Push for improvement

However, it should be realised that relying solely on the local support of Shanghai for promoting arbitration-related systems is insufficient. At this stage, arbitration institutions lack real authority in terms of such key litigation issues as the addition of third parties, property preservation, evidence preservation, etc. The court must push for the improvement and revision of the Arbitration Law, as only in this way can it ensure the convenience and effectiveness of arbitration and further bring to bear the advantages of arbitration.