Limited application of ad hoc arbitration in China

By Tony Zhang and Grace Zheng, Co-effort Law Firm
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Ad hoc arbitration has a long history, compared with institutional arbitration, which has a history of only 125 years. International arbitration circles are familiar with both forms. In China, Article 16 of the Arbitration Law promulgated and implemented in 1995 specifies that an arbitration agreement requires the selection of an arbitration commission. The Interpretations of Several Issues Concerning the Application of the Arbitration Law of the People’s Republic of China issued by the Supreme People’s Court in 2006 also specify that the determination of an arbitration institution is one of the important conditions for an arbitration agreement to be valid. From this it can be seen that the Arbitration Law and its judicial interpretations have determined the principles for institutional arbitration in China, but are silent on ad hoc arbitration. The latter has not been accorded recognition.

张振安 TONY ZHANG 协力律师事务所高级合伙人 Senior Partner Co-effort Law Firm
张振安
TONY ZHANG
协力律师事务所高级合伙人
Senior Partner
Co-effort Law Firm

This has created a paradoxical situation. As a contracting state to the New York Convention, China is required to comply with paragraph 2 of Article 1 of the Convention: “The term ‘arbitral awards’ shall include not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which the parties have submitted”. Accordingly, the foreign arbitral awards specified by the New York Convention include the arbitral awards rendered by permanent arbitration institutions and ad hoc arbitration tribunals, so ad hoc arbitral awards rendered in foreign countries, and even in Hong Kong and Macau, can be recognized and enforced in mainland China. However, the failure of the laws of mainland China to recognize ad hoc arbitration leads to such unfavourable results as limiting Chinese parties’ options in terms of arbitration, and courts being likely to find arbitration agreements to be invalid due to such issues as the lack of a defined arbitration institution. Such an outcome actually runs counter to the original intent of allowing parties to select arbitration to resolve disputes. It is also inimical to Chinese parties and arbitrators comprehensively understanding the state of arbitration in the West and the philosophy of international arbitration, and is also unfavourable to their developing the capabilities to participate in, manage and control arbitration procedures.

Many experts and scholars in China are therefore calling for relaxation on the application of ad hoc arbitration. However, the Arbitration Law still has not been put on the agenda for revision. China is continuing to experiment with reform and open through the establishment of pilot free trade zones (FTZs), and use this as an important window for the creation of a new open economic regime. Against this backdrop, whether ad hoc arbitration – as an internationally accepted method of dispute resolution – can be tried on a pilot basis pursuant to ad hoc arbitration agreed upon based on the principle of autonomy of the parties has become a key topic of attention in arbitration circles, with the purpose to fully respect parties’ agreement over the jurisdiction of arbitration and governing law and to safeguard the validity of their arbitration agreements.

BREAKTHROUGH IN PILOT FTZS

On 30 December 2016, the Supreme People’s Court issued the Opinions of the Supreme People’s Court on the Provision of Judicial Protection for the Establishment of Pilot Free Trade Zones. The third paragraph of Article 9 specifies that, “where enterprises registered in a pilot FTZ agree between themselves to conduct arbitration of a relevant dispute at a specific location in China proper, in accordance with specific arbitration rules and by a specific person or persons, such arbitration agreement may be found to be valid. If the court holds that such arbitration agreement is invalid, it shall request that the court at the next higher level conduct a review. If the higher level court upholds the opinion of the lower level court, it shall submit its review opinion level by level up to the Supreme People’s Court, and wait until the Supreme People’s Court responds before rendering its ruling.”

郑蕾 GRACE ZHENG 协力律师事务所高级合伙人 Senior Partner Co-effort Law Firm
郑蕾
GRACE ZHENG
协力律师事务所高级合伙人
Senior Partner
Co-effort Law Firm

Pursuant to the foregoing provision, an arbitration agreement executed between enterprises registered in a pilot FTZ may be found to be valid if it satisfies specific conditions, namely that a specific location on the mainland is specified, that specific arbitration rules are to be followed and that the relevant dispute is to be arbitrated by a specific person or persons. This indicates that the Supreme People’s Court will fully respect the principle of the autonomy of enterprises registered in pilot FTZs, safeguard the safety of transactions and may find agreements for arbitration “of specific form” to be valid.

It is not expressly stated that arbitration “of specific form” is ad hoc arbitration, but because the agreement for such arbitration does not specify an arbitration institution, it is universally deemed in arbitration circles to be “three specifics” arbitration (also known as pilot FTZ ad hoc arbitration). Accordingly, there is a certain breakthrough in respect of China’s current Arbitration Law and judicial interpretations, and this move is sure to have a profound impact on the arbitration enterprise in China.

On the other hand, for a long time China has only had institutional arbitration, and non-institutional arbitration is not known or only known by a few persons in China. Also, non-institutional arbitration requires the support of a sound legal regime and judicial assistance and supervision, but China’s current arbitration law system is silent on arbitration “of specific form”. Accordingly, how “three specifics” arbitration is to be read and understood as well as the issues that “three specifics” arbitration will encounter in practice and how they are to be resolved are questions that have the attention of industry circles.

Notwithstanding the existence of relevant issues, certain Chinese arbitration institutions have been tripping over themselves in a rush to issue arbitration rules, including some for “three specifics” arbitration, to resolve such issues at the rules level. On 19 September 2017, the China Internet Arbitration Alliance issued the Rules for Bridging Ad Hoc Arbitration and Institutional Arbitration. On 20 November 2017, the alliance accepted a relevant arbitration case, demonstrating that the appropriate relaxation of ad hoc arbitration is in step with the era background of reform and opening, is fully in keeping with the need to respect the autonomy of parties, and reflects the need for the convergence of Chinese arbitration law with the international one. Against such a background, arbitration in China will witness impressive development.

Tony Zhang and Grace Zheng are senior partners at Co-effort Law Firm

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