Arbitration Yearbook China

By: Anthony Poon,1 Simon Hui,2 Peng Shen3 and Allen Fu4

A. Legislation, Trends and Tendencies

A.1 Legislation

International arbitration in mainland China continues to be governed by the following legislation and interpretations: (a) the PRC Arbitration Law, which took effect on 1 September 1995 and was amended on 27 August 2009; (b) the Interpretation of the Supreme People’s Court concerning Some Issues on Application of the Arbitration Law of the People’s Republic of China, which took effect on 8 September 2006 and was amended on 31 December 2008; (c) the PRC Civil Procedure Law, which was amended on 31 August 2012; (d) the Interpretations of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China, which took effect on 4 February 2015; and (e) the corresponding judicial interpretations.

On 1 July 2015, the Provisions on the Recognition and Enforcement of the Arbitral Awards Rendered in Taiwan Region, published by China’s Supreme People’s Court (SPC), became effective. This provides specific guidance on the recognition and enforcement of Taiwan arbitration awards in the PRC.

A.2 Trends and Tendencies

CIETAC has adopted Guidelines on Evidence (“Guidelines”) in accordance with the PRC Arbitration Law, the CIETAC Rules and CIETAC’s arbitration practice, and with appropriate reference to the IBA Rules on the Taking of Evidence in International Arbitration as well as to the Chinese principles of evidence in civil litigation that are suitable for use in arbitration. The Guidelines, which were passed by the CIETAC Chairmen’s meeting on 26 September 2014 and came into effect on 1 March 2015, are used to assist parties, their counsel and arbitral tribunals in dealing with issues of evidence more efficiently in arbitration proceedings.

The Shanghai International Arbitration Center (SHIAC) has established the China (Shanghai) Pilot Free Trade Zone Court of Arbitration in China (Shanghai) Pilot Free Trade Zone (FTZ) to perform arbitration services. Correspondingly, SHIAC has published the China (Shanghai) Pilot Free Trade Zone Arbitration Rules (2015), which took effect on 1 January 2015 (“2015 FTZ Rules”), for the purpose of resolving disputes in connection with the FTZ. The 2015 FTZ Rules made a few changes to the China (Shanghai) Pilot Free Trade Zone Arbitration Rules (2014), an example of which is that parties are now entitled to change relevant provisions of the 2015 Rules by mutual agreement.

In addition, SPC has clarified the jurisdiction of CIETAC, SHIAC and Shenzhen Court of International Arbitration (SCIA) following the rift between CIETAC and its Shanghai and South China sub-commissions by publishing the Reply of the Supreme People’s Court to the Request of Shanghai High People’s Court and Other Courts for Instruction on the Judicial Review Case Concerning the Arbitral Awards Made by the Arbitral Institutions Including CIETAC and its Former Sub-Commissions (the “Reply”). The Reply became effective on 17 July 2015 and, among other things, provides instruction on handling arbitrations where CIETAC’s Shanghai or South China sub-commissions have been selected.

B. Cases

B.1 CIETAC Award Held Valid in Accordance with the Reply

In 2015, a PRC court confirmed the validity of a CIETAC award in accordance with the Reply.5 China Metal Recycling (Holdings) Limited (CMR), a company incorporated in the Cayman Islands, entered into a guaranty contract with Bank of China Shenzhen Development Zone Branch (BOC), a Chinese bank. The agreements provided for disputes to be submitted to the CIETAC South China Subcommission.

In June 2014, the BOC applied to CIETAC for arbitration against CMR. In July 2014, CIETAC decided that it had the right to arbitrate the dispute. In January 2015, the Shenzhen Intermediate Court ruled that CIETAC was not the arbitral institution selected by both parties in the arbitration agreement; however, CIETAC continued to arbitrate the case and made the award on 11 November 2014. In 2015, CMR applied to Beijing No. 4 Intermediate Court for the invalidation of the CIETAC award.

On 12 August 2015, the Beijing No. 4 Intermediate People’s Court held that in accordance with Article 3 of the Reply,6 although CIETAC should have not arbitrated the dispute and made a decision on the case, the award would be held valid.

B.2 SIAC Arbitration Clause Held Valid Due to Foreign Factors

The Shanghai No. 1 Intermediate People’s Court confirmed that an arbitration clause entered into by two PRC companies referring to a foreign arbitration institution was valid, since the court held that the contract contained a foreign-related factor.7

Two PRC companies entered into legal documents, including a purchase agreement, in relation to a power supply system to be installed in Shanghai. The purchase agreement referred to arbitration by SIAC.

Disputes arose between the parties. The purchaser (“Purchaser”), under the purchase agreement commenced arbitration against the seller (“Seller”) before SIAC. The Seller filed a counterclaim. In 2011, SIAC rendered its award in favor of the Seller, which sought enforcement of the award before the Shanghai No. 1 Intermediate People’s Court. The Purchaser applied to set aside the award on the legal ground that the arbitration clause referring to arbitration by SIAC was invalid due to the lack of a foreign factor in the purchase agreement.

On 27 November 2015, the Shanghai No. 1 Intermediate People’s Court ruled to recognize and enforce the award. In this case, the parties are PRC legal entities and the delivery and the current presence of the subject matter was in China, so prima facie, the purchase agreement had no foreign factor that would allow the parties to submit a dispute to a foreign arbitration institution. However, the court looked into other factors when deciding on whether the purchase agreement was foreign-related, including the nature of the PRC companies (i.e., joint ventures established in Shanghai Free Trade Zone) and the manner of performance of the purchase agreement (i.e., the subject matter was imported to China from the foreign country). The court held that the purchase contract was distinguishable from common domestic sales of goods and had the required foreign factor. In addition, the court also weighed the fact that the Purchaser was the party that initiated the SIAC arbitration, attended the whole process of the SIAC arbitration (during which it admitted the validity of the arbitration clause) and partially performed its obligations under the award. The court then held that the Purchaser had violated the doctrines of estoppel, honesty and credibility, and justice and fairness.

In practice, PRC courts generally exercise a strict scrutiny of alleged foreign factors, including the parties, presence of subject matter and the manner of performance of the contract. However, in this instance, the Shanghai No. 1 Intermediate People’s Court’s decision took a broader approach to defining “foreign factors.”

C. Costs in International Arbitration

C.1 Allocation of Arbitration Fees

The arbitration fees are generally borne by the losing party. However, according to the CIETAC Rules (both 2012 and 2015 Rules), the arbitral tribunal may apportion such fees between the parties in appropriate proportion. The CIETAC Rules do not specify the factors that the tribunal should take into account.

C.2 Security for Costs

According to the CIETAC Rules, the tribunal has no right to order a party to provide security for the other party’s costs (either arbitration fees or other relevant expenses).

C.3 Recovery of Costs

In deciding whether or not the losing party should pay the winning party’s expenses incurred in pursuing the case (including outside counsel’s fees), the arbitral tribunal will look into the reasonableness of the expenses by considering various factors, such as the outcome and complexity of the case, the workload of the winning party and/or its representative(s), the amount in dispute, etc.

  1. Anthony Poon is a partner in the Dispute Resolution Group of Baker & McKenzie in Hong Kong. He practices mainly in the area of dispute resolution and has substantial experience in commercial and insurance litigation, as well as insolvency, defamation and media liability matters. He also handles corporate disputes, corporate governance and corporate compliance matters.
  2. Simon Hui is a partner in the Dispute Resolution Group of Baker & McKenzie in Shanghai. He specialises in international commercial arbitration and domestic litigation in the PRC and has a range of international experience.
  3. Shen Peng is a special counsel in the Dispute Resolution Group of Baker & McKenzie in Beijing. He represents international and domestic clients in domestic and international disputes in China. Prior to working in private practice, he was a judge of the Beijing People’s Court.
  4. Allen Fu is an associate in the Dispute Resolution Group of Baker & McKenzie in Shanghai. He represents international and domestic clients in domestic and international disputes in China.
  5. Case No.: (2015) Sizhongminshangtezi No. 00144 by Beijing No. 4 Intermediate People’s Court.
  6. Article 3 of the Reply provides that, “For a case the CIETAC or South China Arbitration Commission or the Shanghai Arbitration Commission has accepted prior to the implementation of this Reply while it should not accept under the provisions of Article 1 of this Reply, if any of the parties concerned, after the arbitration award is rendered, applies to the people’s court for revocation or non-enforcement of the arbitration award on the grounds that the arbitration institution does not have the right to conduct the arbitration, the people’s court shall not uphold the request.”
  7. Case No. (2013) Huyizhongminrenwaizhongzi No. 2 by Shanghai No. 1 Intermediate People’s Court.