Prevention of ‘sham arbitration’

By Jia Shen, CIETAC

Sham arbitration is an action in which a party concerned initiates arbitration and deludes the arbitration tribunal to make an erroneous award by malicious collusion, fabrication of information, falsification of evidence, fictitious legal relationship, and other improper means to seek illegitimate property rights and interests, and thus causes damages to the public interests or property interests of a third party.

Sham arbitration may be identified based on the following four principles. First, the sham arbitration is filed for improper and illegitimate purpose. The party concerned initiates sham arbitration in order to seek illegitimate interests or infringe on related legitimate rights and interests, primarily the interests of third persons and public interests. Prior cases show that, the party concerned with sham arbitration utilizes the arbitration procedure and applies to the arbitration tribunal for confirmation or change of legal relationship, with the purpose of lawfully creating a legal relationship that does not exist or changing or eliminating the existing legal relationship.

Second, in sham arbitration, the party concerned utilizes the confidentiality and privity of the arbitration to cover up its illegal acts. As a result, the arbitration tribunal would make an erroneous award. As the privity of contract is strictly exercised in the arbitration system, it is difficult for a person not involved to participate in the arbitration activity. Thus, it is difficult for him/her to protect his/her legitimate rights and interests by participating in the arbitration procedure. In addition, confidentiality of arbitration eliminates the possibility that a person not involved can be aware of the existence of sham arbitration. Meanwhile, the evidence and opinions reviewed by the arbitration tribunal are limited to the facts compiled by the parties to a dispute. Even through Article 43 of the Arbitration Law stipulates the right of the arbitration tribunal to fact-finding and evidence collection, in practice, the arbitration tribunal, confined by the civil evidence rule that the burden of proof is borne by the claimant, and difficulties in taking of evidence in arbitration, generally has limited capacity in fact-finding for a case.

Third, objectively speaking, in sham arbitration, the arbitration tribunal tends to make an erroneous award based on false statement of facts because the party concerned fabricates information, falsifies evidence, and invents a legal relationship. Consequently, it obstructs the judicial procedures and damages the legitimate rights and interests of others.

Last, sham arbitration utilizes the high efficiency of arbitration, finality of its awards, and systematic combination of conciliation and arbitration to seek time and efficiency benefit brought by an unfair award. In recent years, Chinese arbitration organizations have made enormous contributions to the settlement of disputes and controversies and reducing the costs of safeguarding rights and interest through their high efficiency. Sham arbitration, taking advantage of related institutional arrangements, seriously impairs the legitimate rights and interests of persons not involved in the arbitration and compromises the credibility of arbitration.

Even though the party concerned in sham arbitration utilizes confidentiality and high efficiency of arbitration to achieve its purpose, the original sin of sham arbitration is not attributable to arbitration but to the imperfect credit system and legal system. This problem would be solved by enhancing the ability of the arbitration tribunal to evaluate and identify sham arbitration in the arbitration procedures and improving the right remedy system for persons not involved in the arbitration.


Establish a system to identify sham arbitrations of parties concerned and enhance the ability of the arbitration tribunal to identify sham arbitrations. We advise establishment of a “sham arbitration” identification and alarm system in the stage of docketing arbitration cases. In China, institutional arbitration is adopted. Arbitration organizations generally create specialized posts and departments responsible for placing arbitration cases on docket. These departments should apply “non-adversary” and “hand-in-hand arbitration” as one of the standards to identify potential “sham arbitration”. In cases of uncontested property disputes and confirmation of settlement agreements, an early warning mechanism should be in place to predict the level of due diligence required for fact finding for arbitration.

In the meantime, in the stage of case hearing, the arbitration tribunal should fully utilize its fact-finding obligation prescribed in the Arbitration Law and arbitration rules, so that every chain of the contractual transaction will be subject to the arbitration procedure and falsified facts will become untenable. In this way, unfair awards as a result of sham arbitration initiated by the party concerned can be avoided. In the meantime, the arbitration tribunal should identify the party concerned when dismissing the sham arbitration application, so as to lay a foundation for building of a credit system for the judiciary and arbitration.

Implement applicable judicial interpretations and safeguard legitimate rights and interests of the persons not involved in the arbitration. The Supreme People’s Court (SPC) issued the Provisions on Several Issues Concerning the Handling of Cases by People’s Courts to Enforce Arbitration Awards, which became operative on 1 March 2018. Its main provisions include:

First, the effect and procedure of application for non-enforcement of arbitration award by persons not involved in the arbitration. If a person not involved in the arbitration applies for non-enforcement of an arbitration award and provides proper security, the enforcing court should rule stay of enforcement. During the stay, the people’s court should suspend disposal measures. The person, who is not involved in arbitration and applies to the people’s court for non-enforcement of an arbitration award or mediation, should submit the application and evidence documents to prove that the claim stands and meet the following three conditions:

(1) there is evidence to prove that the party concerned in the arbitration maliciously applies for arbitration or sham arbitration, which damages the legitimate rights and interests of the person not involved;

(2) the award enforcement has not be completed on the subject matter of enforcement in relation to the legitimate rights and interests claimed by the person not involved;

(3) the person not involved in the arbitration submits the application within 30 days of the day when he/she is aware of or should be aware of the people’s court’s enforcement of arbitration award on the subject matter.

Second, form and time limit of examination by the people’s courts. The people’s court should form a collegial panel for cases of non-enforcement of arbitration awards. The court should examine the cases of non-enforcement of arbitration awards and make decisions within two months of the day of docketing.

Third, substantial examination standards. If the person, who is not involved in the arbitration but applies for non-enforcement of arbitration awards or conciliations, meets the following conditions, the people’s court should support his/her claim:

(1) the person not involved is the holder of the rights or interests;

(2) the rights or interests claimed by the person not involved are legitimate and authentic;

(3) the legal relationship between the parties concerned in the arbitration case is fictitious and the statement of facts is false;

(4) the main body of the arbitration award or the part of the mediation statement relating to handling of civil rights and obligations of the person concerned is partially or completely erroneous, causing damage to the legitimate rights and interests of the person not involved.

The SPC provisions also laid out: the handling procedure of the application of the person not involved; and the remedies and remedial approaches after non-enforcement.

To conclude, what is needed now is to put revision of the Arbitration Law on the agenda. Before that, applicable judicial interpretations can provide effective channels to persons not involved in the arbitration to seek legal remedies. Prevention of “sham arbitration” requires further improvement of arbitration rules and laws on arbitration.

Jia Shen is the deputy director of the BD division of the China International Economic and Trade Arbitration Commission