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A. LEGISLATION AND RULES

A.1       Legislation

A.1.1    Proposed Amendment to PRC Arbitration Law

On 30 July 2021, China’s Ministry of Justice published the proposed amendments to the current PRC Arbitration Law for public consultation. The draft amendment represents a major overhaul of the current arbitration regime that was introduced 26 years ago, with the primary aims of bringing the PRC arbitration law more into line with international best practices and making China a more attractive seat for arbitration internationally. If implemented, the amended PRC Arbitration Law will have a far-reaching impact on the way arbitration will be conducted in China. So far, the draft proposal has received largely positive feedback from the arbitration community as a welcoming move to foreign-related arbitration in China.

Some of the key highlights of the proposed amendment are:

  • Foreign arbitration institutions like HKIAC (Hong Kong), ICC (Paris), SIAC (Singapore) would be permitted to establish their presence in China to administer foreign-related arbitration in China. Parties to arbitrations administered by these bodies in China would be able to apply for interim measures from Chinese courts in aid of the arbitrations, which, hitherto, Chinese courts have no power to do as the existing legal regime prevents Chinese courts from granting interim measures in aid of arbitrations administered by a foreign arbitration institution (except those located in Hong Kong).
  • International businesses will have the option to select a well-established international arbitration institution to resolve their disputes in China.
  • Ad hoc arbitration for commercial disputes involving foreign-related elements would be permitted, which means that the parties would not have to designate an arbitration institution to conduct arbitration in China. It will give the parties the freedom to decide how they want to organize their arbitration and who they want to appoint as the arbitrators (i.e. they have the liberty to determine the criteria as to who can qualify).
  • The new amendment also unifies the grounds for setting aside domestic and foreign-related awards and introduces a new ground to the existing law for setting aside awards. The new amendment further abolishes most of the grounds for refusing enforcement of awards, providing that an award cannot be enforced only if it is “against social public interest”. The proposed changes will bolster the integrity of an award by limiting the grounds for challenging awards to only procedural irregularities or violations of social public interest.

A.1.2    Civil Code and Arbitration

On 1 January 2021, the PRC Civil Code (“Civil Code“) enacted by the National People’s Congress (NPC), came into force. This comprehensive legislation covers almost every dimension of civil society and will certainly impose significant influence on arbitration practice in China.

First, the Civil Code clarifies the scope of disputes that can be submitted to arbitration. Property rights-related disputes and property service disputes can also be resolved through arbitration.

Second, the Civil Code affirms that the legal instruments of arbitration institutions (e.g., awards) have the legal effect of generating changes in property rights. If a property right is established, changed, transferred or extinguished as a result of a legal instrument of an arbitration institution, the effect shall occur when the legal instrument takes effect.

Third, the Civil Code stipulates that the limitation period for applying for arbitration is three years unless otherwise provided by law (e.g., the limitation period for disputes over international contracts for the sale of goods or technical import and export contracts is four years).

The impact of the Civil Code on the arbitration arena goes far beyond the above and we will continue to follow the latest developments.

A.1.3    Judicial Review of Arbitration and Prosecutorial Supervision of Arbitration Awards

On 24 December 2021, the SPC issued the revised “Relevant Provisions of the Supreme People’s Court on the Reporting and Verification of Arbitration Judicial Review Cases”, which came into effect on 1 January 2022.

Previously, the refusal to enforce or set aside a domestic Chinese award can only be achieved after the approval of the Higher People’s Court. Now with the new amendment, the approval of SPC is required to refuse to enforce or set aside a domestic arbitral award on the ground of violation of public interest. Specifically, after reviewing the arbitration cases (without foreign, Hong Kong, Macao or Taiwan factors), the High People’s Court that intends to agree with the Intermediate People’s Court or the Special People’s Court to not enforce or set aside the arbitral award of China’s mainland arbitral institutions on the grounds of violations of public interest, should report to the SPC for approval within 15 days, pending the review of the SPC before making a decision.

The Supreme People’s Procuratorate (SPP) has also updated its rules regarding arbitration (“Rules for the Supervision over Civil Proceedings by the People’s Procuratorates). In these new rules, the SPP has been expressly given the authority and mandate to supervise the Chinese courts’ decisions relating to the enforcement of arbitral awards. Specifically, where the people’s court violates the law or errs in the review and processing of the parties’ application for enforcement or set-aside of arbitral awards, the SPP has the right to send a written recommendation to urge the court to address and rectify the errors/violations.

A.1.4    Jurisdiction of Financial Courts over Enforcement of Arbitral Awards

On 1 March 2021, the SPC issued the “Provisions of the Supreme People’s Court on the Jurisdiction of Cases with respect to Beijing Financial Court”, which provides that arbitral awards involving financial civil and commercial disputes within Beijing to be enforced by intermediate people’s courts shall be enforced by the Beijing Financial Court.

Similarly, on 21 April 2021, the SPC issued the “Provisions of the Supreme People’s Court on the Jurisdiction of Cases with respect to Shanghai Financial Court”, which provides that arbitral awards involving financial civil and commercial disputes within Shanghai to be enforced by intermediate people’s courts shall be enforced by the Shanghai Financial Court.

A.1.5    Securities and Futures Industry Arbitration Pilot Scheme

In July 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the “Opinions on Strictly Combating Illegal Activities in Securities in accordance with the Law”, which explicitly called for a pilot project regarding the securities industry arbitration system.

Subsequently, on 15 October 2021, the China Securities Regulatory Commission and the Ministry of Justice jointly promulgated “Opinions on Piloting Arbitration in the Securities and Futures Industry in accordance with the Law”, supporting the piloting of arbitration courts (centers) in Beijing, Shanghai and Shenzhen for securities and futures within the arbitration committees to specifically deal with the securities and futures disputes.

A.2       Institutions, Rules and Infrastructure

A.2.1    Beijing Arbitration Commission Amends Arbitration Rules

On 24 December 2021, the Beijing Arbitration Commission/Beijing International Arbitration Centre (“BAC/BICAC”) issued the BAC/BICAC Arbitration Rules (2022 edition), which came into effect on 1 February 2022. The main amendments include:

  • Clarifying the mode of hearings including virtual hearings, and providing that the arbitral tribunal has the right to determine the mode of hearings having considered the circumstances of the case;
  • Adding the mode of selection of the presiding arbitrator, so that if the parties fail to jointly select the presiding arbitrator, the presiding arbitrator may be jointly selected by two arbitrators.
  • Clarifying the effect of electronic service of process, and providing that the BAC/BICAC or the arbitral tribunal has the right to adopt the appropriate mode of service according to the circumstances of the case.
  • Reducing the capped amount of institutional fees.

A.2.2    China Maritime Arbitration Commission Amends Arbitration Rules

In October 2021, the China Maritime Arbitration Commission (CMAAC) issued the China Maritime Arbitration Commission Arbitration Rules (2021 edition), which came into effect on 1 October 2021. This new version of the arbitration rules not only respects the autonomy of the parties to the greatest extent possible but also prevents abuse of the parties’ rights and safeguards the quality of arbitration by making significant changes to the tribunal constitution procedures. These arbitration rules provide that:

  • The parties may select arbitrators from outside the CMAAC’s panel of arbitrators.
  • The presiding arbitrator and the sole arbitrator shall be appointed from the panel of arbitrators.
  • If the parties are unable to jointly appoint the presiding arbitrator, the two arbitrators chosen by the parties shall be jointly appointed, and if they are unable to do so within the time limit, the director of the CMAAC shall appoint the presiding arbitrator.

Additionally, to optimize arbitration resources and enhance quality and efficiency, the arbitration rules adopt the term “expedited procedures” to replace the term “summary procedures” and raise the maximum amount in dispute for expedited procedures from RMB 2 million to RMB 5 million (approximately USD 785,000).

B. CASES

B.1       Validity of the arbitration agreements

B.1.1    The Hangzhou Intermediate People’s Court held that an arbitration clause choosing SIAC is invalid due to the lack of foreign element

The parties entered into a license agreement for the development and licensing of software related to computer vision technology. One party filed a lawsuit with Hangzhou Intermediate People’s Court on the grounds that the other party had defaulted on payment and breached the contract in bad faith. The other party filed a jurisdictional objection, arguing that the dispute between the parties based on the contract should be submitted to arbitration in Singapore.

However, the court held that the parties to the agreement, the subject matter of the contract, and the legal facts of the establishment, modification and termination of the legal relationship did not have foreign elements; therefore, the agreement did not belong to foreign-related civil relationships. In particular, the court is of the view that foreign-invested enterprises, though incorporated in the Shanghai Pilot Free Trade Zone, will still be considered Chinese legal entities and pose no foreign factor. Accordingly, the court held that an arbitration clause that has no foreign element will be deemed invalid if the parties choose arbitration to be administered by a foreign arbitration institution. The SPC upheld the lower court’s ruling and decided that the arbitration clause of the agreement was invalid.

B.1.2    The SPC confirms that a lien dispute falls under the scope of an arbitration clause of an underlying agreement that gives rise to the right of lien

In July 2016, Guangzhou Aircraft Maintenance Company and Thai Airways signed a General Terms and Conditions Agreement, stipulating that Guangzhou Aircraft Maintenance Company would provide temporary inbound aircraft maintenance services for Thai Oriental Company. The agreement provided for arbitration to be administered by CIETAC. In December 2018, Guangzhou Aircraft Maintenance commenced arbitration with CIETAC against Thai Airways, requesting the payment of outstanding aircraft maintenance service fees, material fees, parking fees, etc. On 3 September 2019, CIETAC ruled in favor of most of Guangzhou Aircraft Maintenance’s requests.

Thereafter, Guangzhou Aircraft Maintenance Company filed a lawsuit with the Guangzhou Intermediate Court, requesting a declaration that it had a lien on the four aircraft parked by Thai Airways at its premises and handed over to it for maintenance. On 29 September 2020, the SPC ruled that “the case is a first-instance international commercial case with significant impact and typical significance, and involving huge interests” and hence should be heard by the First International Commercial Tribunal.

Thai Airways objected to jurisdiction, arguing that the case was a contractual dispute and that according to the arbitration clause agreed upon by the parties, the case should be subject to the jurisdiction of CIETAC. Guangzhou Aircraft Maintenance Company responded that this case was a dispute over the right of lien rather than a dispute over the maintenance contract, that the right of lien was a legal right rather than a contractual right, and that the dispute arising therefrom was a dispute over property rights rather than a contract dispute. The First International Commercial Court held that the dispute, in this case, fell within the scope of the arbitration clause under the General Terms and Conditions Agreement. The court pointed out that although this case was a dispute over the exercise of lien right, the dispute arose from the parties’ performance of the maintenance contract, which was a “dispute arising out of or in connection with this agreement” as stipulated in the arbitration clause.

B.1.3    The SPC upholds the validity of an arbitration clause choosing litigation or arbitration

On 8 November 2002, Mingfa Company and Baolong Company signed a cooperation contract. The contract stipulates that “if the dispute cannot be mediated, it may be submitted to the local arbitration institution for arbitration or litigation in the competent people’s court”.

On 26 November 2009, Baolong applied to the Xiamen Arbitration Commission for arbitration in accordance with the agreement. On 1 December 2009, Mingfa Company received the notice of acceptance and related materials from the Xiamen Arbitration Commission, nominated the arbitrators, and raised no objection to Xiamen Arbitration Commission’s acceptance of the case and the constitution of the arbitral tribunal. The two parties participated in the arbitration hearing until the arbitration commission rendered the award on 30 October 2018.

Subsequently, Mingfa applied to the Xiamen Intermediate People’s Court to set aside the arbitral award, and the court dismissed the application. Mingfa filed a lawsuit with the Fujian Higher People’s Court which again dismissed Mingfa’s claims, on the ground that after the arbitral award is rendered, if the parties apply for arbitration or file a lawsuit with the people’s court for the same dispute, the arbitration commission or the people’s court shall not accept it.

Mingfa filed an appeal with the SPC which upheld the Fujian Higher People’s Court’s decision. The SPC invoked the PRC Arbitration Law and the judicial interpretation which provided that an arbitration agreement is invalid if it chooses litigation or arbitration unless one party commences arbitration and the other party fails to raise a jurisdictional objection before the first hearing. In this case, the SPC held that since Mingfang failed to object to the jurisdiction of the Xiamen Arbitration Commission in the conduct of the proceedings, it should be bound by the arbitration clause and hence is not allowed to file civil litigation with the court.

B.2       Interim measures in aid of foreign arbitration

B.2.1    Nanjing Maritime Court refused to issue interim measures in aid of ad hoc arbitration seated in Hong Kong

On 24 October 2017, Zhucheng Company signed the Voyage Charter Contract with Hefeng Company. But Bingfeng failed to fulfill its contractual obligation and hence Zhucheng commenced an ad hoc arbitration as agreed under the contract. Zhucheng had also applied to Nanjing Maritime Court to preserve Bingfeng’s assets in China up to the value of RMB 6 million (approximately USD 950,000).

The Nanjing Maritime Court rejected Zhucheng’s application for asset preservation measures on the ground that the PRC-HK Arrangement on Interim Measures only applies to institutional arbitration seated in Hong Kong but not ad hoc arbitration.

B.3       Recognition Separate from Enforcement

B.3.1    Shanghai Financial Court clearly separates the recognition and enforcement proceedings of an arbitral award

One party entered into a Warranty Contract with the other party and agreed that the dispute resolution would be through arbitration in Singapore under the arbitration rules of SIAC then in force. One party initiated arbitration before SIAC and the arbitral tribunal rendered an award, awarding the other party immediate payment of principal, interest, arbitration costs, etc.

In 2021, one party applied to the Shanghai Financial Court for recognition and enforcement of the award in accordance with the New York Convention. The other party defended that, as it engaged in the liquefied gas pipeline business, it should be considered a Chinese enterprise affecting social and livelihood projects, and hence according to the provisions of the “Measures for Blocking the Improper Extraterritorial Application of Foreign Laws and Measures” (“Blocking Measures“), the court needed to consider the spirit of protecting the development of private enterprises during the trial; also, the other party pointed out that the amount of enforcement, in this case, was incorrectly calculated.

The Shanghai Financial Court reasoned as follows:

  • Given that both China and Singapore were parties to the New York Convention, the Shanghai Financial Court recognized the ruling made by SIAC. The Blocking Measures were not relevant to this case.
  • The enforcement amount was not the focus of the review of the recognition proceedings, and the other party had not provided evidence on the exact amount to be enforced, so the deposit would not be deducted for the time being. Besides, the court argued that the parties could resolve the enforcement amount issue in the enforcement proceedings.
Author

Simon Hui is a member of the Dispute Resolution team at Baker & McKenzie Hong Kong. Simon Hui is a partner in Baker & McKenzie's Dispute Resolution Practice Group in Shanghai. Mr. Hui has 18 years of experience and focuses his practice on commercial and insurance dispute resolution, and regulatory and compliance matters. He also has extensive experience representing clients in both domestic and international arbitration institutions including CIETAC, SHIAC, HKIAC. Simon Hui can be reached at [email protected] and + 61 2 8922 5221.

Author

Hailin Cui is an associate in Baker McKenzie FenXun's Beijing office. Ms. Cui’s practice focuses on international dispute resolution including commercial arbitration and China-related litigation, and compliance matters such as internal bribery and corruption investigation as well as other non-compliant misconduct.