China extends access to offshore arbitration

On 30 December 2016, China's Supreme People's Court (SPC) issued a notice aimed at strengthening judicial support for the development of pilot free trade zones in China. The notice includes a number of pro-arbitration guidelines that, to some extent, could be deemed an attempt to liberalise and internationalise China's current arbitration regime within range of the pilot free trade zones. In particular, companies incorporated in the Shanghai Free Trade Zone can, in certain circumstances, now agree to arbitrate disputes among themselves outside mainland China. The Opinion may also allow such companies to apply the rules of non-Chinese arbitral institutions, or to hold ad hoc arbitrations (which are otherwise not permitted in mainland China). However, the position here is less clear.

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The SPC notice, entitled "Supreme People's Court Opinion on the Provision of Judicial Safeguards for the Construction of Pilot Free Trade Zones" (FTZ Opinion), sets out guidelines for courts handling cases involving pilot free trade zones, with an emphasis on reform and innovation. In Article 8 FTZ Opinion, the SPC calls for courts to "encourage the use of alternative mechanisms, such as arbitration and mediation, to resolve commercial disputes within the pilot free trade zones", to "support the innovation and development of the arbitration institutions" and to "provide judicial convenience for the variety of commercial disputes resolution within the pilot free trade zone".

Foreign seated arbitration between WFOEs registered in free trade zones

Paragraph 1, Article 9 of the FTZ Opinion states that, if two wholly foreign owned enterprises (WFOE) that are registered within a pilot free trade zone enter into an agreement to submit disputes to arbitration seated outside mainland China, the courts should not hold such arbitration agreement as invalid merely on the ground that the dispute concerned is not foreign-related.

The general rule in China is that only foreign-related disputes can be arbitrated with a seat outside mainland China. Arbitration clauses submitting "non-foreign related" disputes to arbitration outside mainland China will be held invalid. A dispute is deemed foreign-related if (a) at least one of the parties to the dispute is foreign or has its habitual residence outside of China; (b) the subject matter of the dispute is outside China; (c) the occurrence, modification or termination of the civil relationship between the parties takes place outside of China; or there are "any other circumstances that may be deemed foreign-related". Foreign invested enterprises in China, including WFOEs, are companies incorporated and registered in China and thus were not previously considered foreign parties. Unless, therefore, other foreign-related elements exist, disputes between two WFOEs would not be regarded as foreign-related, and could not be submitted to arbitration seated outside of China.

The above position now seems to have changed slightly, at least within the pilot free trade zones, by virtue of paragraph 1, Article 9 of the FTZ Opinion. The implication of paragraph 1, Article 9 seems to be that, if both parties are WFOEs incorporated in a pilot free trade zone, that would be sufficient to make a contract "foreign related" and thus eligible for foreign-seated arbitration. As explained below, this measures seems to be based closely on the rationale of the Shanghai No.1 Intermediate People's Court's in Siemens Int'l Trading (Shanghai) Co., Ltd. v. Shanghai Golden Landmark Co., Ltd. (Golden Landmark case).

The SPC further provides in paragraph 2 of Article 9 that, if a party opposes the recognition or enforcement of an arbitration award rendered in a foreign-seated arbitration merely on the ground that there is no foreign-related element, the courts shall not uphold the objection if (a) at least one of the parties to the arbitration dispute is a foreign invested company registered within a pilot free trade zone; (b) the parties entered into an arbitration agreement submitting disputes to arbitration seated outside mainland China; (c) the opposing party was the claimant who initiated the foreign-seated arbitration in the first place, or the opposing party was the respondent who participated in the foreign-seated arbitration without challenging the validity of the arbitration clause throughout the arbitration.  Here, the opposing party's previous submission to or acquiescence with regard to the foreign seated arbitration seems to be a crucial element for the dismissal of an opposition to recognition/enforcement.

As noted, the provisions in paragraphs 1 and 2, Article 9 of the FTZ Opinion seem to be in line with the position taken by the Shanghai No.1 Intermediate People's court in November 2015 in the Golden Landmark case. In that case, the Shanghai court dismissed the respondent's opposition to the enforcement of a SIAC award. Specifically, the Shanghai court referred to the facts that (1) both parties to that dispute were WFOEs registered in the Shanghai Pilot Free Trade Zone and thus their capital, profits and management operations were closely related to their foreign investors; (2) the subject matter of the contract had to be imported from abroad to the Shanghai Pilot Free Trade Zone and go through customs clearance procedures, which was more akin to international sales of goods than domestic sales; and (3) the party opposing enforcement of the arbitral award was the claimant in the arbitration and had been taking the stance that the arbitration agreement was valid throughout the process of the arbitration. While the Shanghai court's decision was just a first-instance decision and did not have binding effect upon other courts (as there is no case law system in China), the FTZ Opinion by the SPC seems to have endorsed the relatively liberal position taken by the Shanghai court in handling arbitration-related cases involving the Shanghai pilot free trade zone.

However, the above-mentioned "liberalisation" by the SPC in relation to foreign-seated arbitrations between WFOEs is not without limits. First, these provisions apply only to WFOEs and FIEs registered within the pilot free trade zones. (At the time of writing, there is only one pilot free trade zone, the Shanghai Pilot Free Trade Zone, established in China, although in 2016 the PRC government approved the plan to establish pilot free trade zones in ten other regions). Second, unless both parties are WFOEs within a pilot free trade zone, evidence of the opposing party's waiver or acquiescence is required for the court to dismiss any opposition to recognition or enforcement on the ground of lack of foreign element.

Permission for ad hoc arbitration in mainland China?

Additionally, the SPC states in paragraph 3, Article 9 of the FTZ Opinion that an arbitration agreement "between two companies registered within the pilot free trade zones, which provides for arbitration in a specified location in mainland China pursuant to specified arbitration rules and by specified arbitrators" may be held valid. If a court is minded to rule such an arbitration agreement as invalid, it should report its intended decision to a higher court for further review. If the higher court holds the same view, it should report its intended decision to the SPC. In effect, only with the SPC's approval could a court rule such an arbitration agreement as invalid.

Although the wording is not very clear, paragraph 3, Article 9 FTZ Opinion could be read as allowing arbitration administered by non-Chinese arbitration institutions in China, if all parties to the arbitration are companies registered within a pilot free trade zone. In the past, the basic position has been that arbitrations seated in mainland China must be administered by domestic arbitration commissions. The first time the SPC tried to relax such limitation was in the Longlide case in March 2013, where it upheld an arbitration agreement that provided for ICC arbitration with a "place of jurisdiction" in Shanghai.  In the last two years, a number of international arbitration institutions, including the ICC, HKIAC and SIAC, have opened offices in the Shanghai pilot free trade zone. While these offices do not yet appear to have the capability to accept cases or administer arbitrations in mainland China, the FTZ Opinion might have opened a way for these arbitration institutions to do just that, albeit with many restrictions.

The wording in paragraph 3, Article 9 has also been read by certain commentators as including an arbitration agreement for ad hoc arbitration. If that is correct, this provision indicates that the SPC has, for the first time, allowed the possibility of ad hoc arbitrations seated in mainland China. This would be an encouraging breakthrough. Prior to the FTZ Opinion, it has been clear that ad hoc arbitration is not permitted in mainland China: Article 16 PRC Arbitration Law requires that a valid arbitration clause must specify the designated arbitration commission to administer the arbitration.

Encouraging as paragraph 3, Article 9 might seem to be, its impact in practice remains uncertain. First, the provision applies only to arbitrations between two companies registered within a pilot free trade zone, thus its application in practice would be limited. Second, specific guidelines regarding the conduct of an ad hoc arbitration in China are still missing. Even if it did apply to ad hoc arbitrations seated in mainland China, the high level statement in paragraph 3, Article 9 does not address the more detailed issues such as appointing authorities (e.g. can non-Chinese arbitration institutions be appointing authorities?), applicable arbitration rules (e.g. can the parties adopt CIETAC rules in an ad hoc arbitration without administration by CIETAC?) and enforcement issues concerning ad hoc arbitrations in China.

Conclusion

While its practical impact remains to be seen, the FTZ Opinion nonetheless clearly signals that the SPC is gradually adopting a more relaxed and liberalised approach to arbitration, albeit within the limit of statutory constraints. It seems the SPC, like the PRC government itself, is taking advantage of the "exceptional" and "experimental" nature of the pilot free trade zones to try out some more liberalised approaches to (at least foreign-related) Chinese arbitration. Hopefully, as Chinese arbitration develops further and more in line with international practice, the liberalisation indicated in the FTZ Opinion will be extended beyond the pilot free trade zone in the near future. Needless to say, before any broader liberalisation can take place, this would require endorsement from not only the SPC but also the National People's Congress, by amending the relevant legislation.

Kathryn Sanger
Kathryn Sanger
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Briana Young
Briana Young
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Helen Tang
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UPDATE: Singapore passes law to legalise third-party funding of international arbitration and related proceedings

On 10 January 2017 the Singapore Parliament passed amendments to the Civil Law Act legalising third-party funding in arbitration and related proceedings in Singapore (the "Amendments"). Following a year of positive developments for arbitration in Singapore, this latest development will open up a significant new market for funders worldwide, further asserts Singapore's eminence as an arbitral centre and paves the way for further and deeper reform.

Overview

We previously reported on the introduction of the Civil Law (Amendment) Bill in our blog posts of July 2016 and November 2016. The key features of the Bill were to:

  • abolish the common law torts of champerty and maintenance (which currently restrict the use of third party funding);
  • confirm that third party funding is not contrary to public policy or illegal, if used by eligible parties in prescribed categories;
  • confirm that the prescribed categories of proceedings in which third party funding can be used include international arbitration proceedings and court litigation and mediation arising out of international arbitration; and
  • prescribe the qualifications that a third party funder must satisfy in order to fund an arbitration, including a proviso that the funding of dispute resolution proceedings must be the "principal business" of the third party funder.

While the legislation makes the broad legal amendments necessary to facilitate third-party funding, the finer details – such as the precise scope of the permitted arrangements and accompanying regulatory changes – will be dealt with by subsidiary legislation and regulations by the Minister of Law.

Interestingly, early reports of Ministers' comments on the legislation, indicate that the Amendments – currently limited to international arbitration and related proceedings – are very much a first step toward broader reform. Singapore's Senior Minister of State for Law, Ms Indranee Rajah, reportedly stated that "We want to have [third-party funding] tested in a limited sphere … If the framework works well, as and when appropriate, the prescribed categories of proceedings may be expanded". This will be of significant interest to funders and practitioners alike, as it clearly positions Singapore as a growth market.

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SIAC Investment Arbitration Rules

The Singapore International Arbitration Centre (SIAC) has announced the release of its Investment Arbitration Rules (the Rules), which came into force on 1 January 2017.  This release follows the earlier public consultation in February 2016, when practitioners were invited by SIAC to review and comment on the draft of the Rules.

The Rules are the first of a kind. While private arbitral institutions often administer both commercial and investment arbitration, such as the ICC or the Stockholm Chamber of Commerce, SIAC is the first private institution to introduce a specific set of arbitration rules for investment arbitrations.  In creating a dedicated set of rules, SIAC has adopted innovative approaches to address some of the key procedural issues commonly encountered in investment arbitration.  

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EU launches consultation on multilateral reform of the investor-state dispute resolution system

The EU Commission (the Commission) has launched a public consultation on the multilateral reform of the investment dispute settlement system.  The survey is found here and responses are due by 15 March 2017.  The consultation is the next step in furtherance of the Commission's objective to develop a multilateral system for the resolution of international investment disputes and, amongst other things, seeks to explore views on its proposal to develop a permanent multilateral investment court system.

The development of the Commission's position over the last couple of years and the Commission's introduction to the consultation both suggest a determination to pursue wholesale change to the system of resolution of investor-state disputes, rather than a more nuanced approach in evaluating the perceived flaws in the current system under which investor-state disputes are largely resolved by ad hoc arbitration (often under the auspices of ICSID, part of the World Bank).  However, notwithstanding its clearly stated objective, the Commission's survey also countenances in the alternative the establishment of a Multilateral Appeal Tribunal which would consider appeals from the decisions of ad hoc investment arbitration tribunals established under the current system. 

The responses to the consultation will be significant in terms of the future of the Commission's objective to establish a Multilateral Investment Court. In particular, it will be crucial that a constructive and positive response is received from the third party states who are asked to partner with the Commission in developing the Multilateral Investment Court system.  However, it remains to be seen whether the survey will elucidate clear responses which will assist the Commission in considering further its proposals for the future of investor-state dispute settlement: the majority of the survey questions treat as interchangeable the two different approaches (the establishment of a Multilateral Investment Court system and the establishment of a Multilateral Appeal Tribunal) and the survey does not seek responses on the development of a Multilateral Appeal Tribunal alongside reform of the current system of ad hoc arbitration.  It is not clear whether this option continues to be considered by the Commission.

The issues and controversies surrounding the resolution of investor-state disputes are complex and any changes to the system pursued by the Commission would ideally be based on clearly expressed views from a range of stakeholders.  It is to be hoped therefore that respondents to the survey take the opportunity offered by the Commission to clarify their responses by way of uploading a position paper. 

With unprecedented growth in foreign direct investment, issues concerning substantive investment protection and the way in which investor-state disputes are resolved both now and in the future are significant for both states and investors.  If you would like to discuss these issues or the Commission's consultation, please contact: Larry Shore, Partner, Dominic Roughton, Partner, Christian Leathley, Partner, Andrew Cannon, Partner, Iain Maxwell, Of Counsel, Vanessa Naish, Professional Support Consultant, Hannah Ambrose, Professional Support Consultant or your usual Herbert Smith Freehills contact. 

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First CIETAC HK award enforced in mainland China

On 13 December 2016, the Nanjing Intermediate People's Court of Jiangsu Province (the "Nanjing Court") issued its decision in Ennead Architects International LLP v. Fuli Nanjing Dichan Kaifa Youxian Gongsi (2016) Su 01 RenGang No.1 (the "Decision"). The Decision marks the first time that a Chinese court has enforced a CIETAC Hong Kong Arbitration Center ("CIETAC Hong Kong") arbitral award in mainland China.

Background

In 2015, the claimant, Ennead Architects International LLP ("Ennead"), an American architectural design firm, commenced arbitration proceedings at CIETAC Hong Kong  against a Chinese property developer, Fuli Nanjing Dichan Kaifa Youxian Gongsi (R&F Real Estate Development Co., Ltd. Nanjing) ("R&F"), seeking design fees and unpaid interest pursuant to two property design contracts (the "Contracts").

The hearing took place in Hong Kong on 25 August 2015, and the tribunal issued its final award on 28 November 2015 (the "Award"). The Award found in favour of Ennead, and ordered R&F to pay immediately all of Ennead's design fees and interest owed under the Contracts, as well as to bear liability for all arbitration costs. In compliance with the Award, R&F paid Ennead its design fees and arbitration costs. However, in relation to the interest awarded, it entered into a settlement agreement with Ennead. Pursuant to the terms of the settlement agreement, Ennead agreed to accept the lower sum of RMB 600,000 in full and final settlement of interest due, but on the condition that R&F made payment by 31 May 2016; otherwise, and failing payment within this deadline, Ennead would be able to pursue R&F for the entire amount of the interest owed under the Award, a total of RMB 851,438.59.

R&F failed to make the required interest payment by 31 May 2016. Ennead accordingly brought enforcement proceedings against R&F before the Nanjing Court, seeking to enforce the outstanding interest element of the Award. In response, R&F informed the Nanjing Court that it did not object to the Award, and admitted that it had failed to pay the interest as required by the Award.

In its Decision, the Nanjing Court expressly referred to and relied on the 1999 Arrangement Concerning Mutual Enforcement of Arbitral Awards between Mainland China and Hong Kong (the "Arrangement"), and commented that under Article 7 thereof, the enforcing court could deny enforcement where the defendant party adduced evidence of one of the grounds listed in Article 7  (which mirrors Article V of the New York Convention). However, in this case, the Nanjing Court noted R&F had not sought to invoke any of the grounds in Article 7. Instead, it had affirmed its agreement to the terms of the Award, and voluntarily complied with all the orders made, except the payment of interest. The Nanjing Court also found that enforcement of the Award would not contradict the public interests of mainland China, a residual ground for refusing enforcement under Article 7. On this basis, the Nanjing Court ruled to enforce the outstanding interest element of the Award pursuant to Articles 1 and 7 of the Arrangement.

Comment

The Decision marks the first time a CIETAC Hong Kong award has been enforced in mainland China. By establishing a Hong Kong branch in September 2012, CIETAC (which has historically been the arbitration institution of choice in Mainland China for Chinese enterprises) sought to boost its international presence and to allow greater flexibility by allowing China-related disputes with a nexus to Hong Kong to be seated in Hong Kong arbitration and resolved in Hong Kong.

Although the facts of this case are somewhat unusual, in that R&F did not resist enforcement of the Award under the terms of the Arrangement, the Decision nonetheless demonstrates that the Chinese courts recognise the validity of, and are prepared to enforce, awards rendered under the auspices of CIETAC Hong Kong. As a result, it enhances Hong Kong's world-class reputation for international commercial arbitration, and will be welcomed by arbitration practitioners and users considering different institutional options for arbitrations seated in Hong Kong.

Kathryn Sanger
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Mark Chu
Mark Chu
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Advocate General issues opinion that the EU does not have exclusive competence to conclude the EU-Singapore Free Trade Agreement

In an opinion issued on 21 December 2016, EU Advocate General Eleanor Sharpston QC has concluded that the EU-Singapore Free Trade Agreement (EUSFTA) will need to be finalised by the European Union and the Member States acting jointly, i.e. entered into by the EU and all of its Member States (as a so-called "mixed agreement"), not just by the EU alone. Although the opinion does not bind the CJEU, the court tends to follow the approach adopted by the Advocate General. The CJEU is expected to issue its own judgment in 2017.

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CETA UPDATE: CETA is signed; Provisional application of CETA and Brexit; First government-to-government meeting to discuss establishing the multi-lateral investment court system

On 30 October 2016, the EU and Canada signed the Comprehensive Economic and Trade Agreement (the CETA).  As explained in our blog post here, the text of the CETA, which was originally agreed in 2014, was subjected to "legal scrubbing" in February 2016 which led to the inclusion, at the instigation of the EU, of an Investment Court System (an ICS) in place of the ad hoc investor-State arbitration provisions which had originally been included in CETA, and are included in roughly 3200 international investment agreements and other treaties. 

On 13 and 14 December 2016, the European Commission (the Commission) and the Canadian Government met in Geneva to engage in "exploratory discussions" with government representatives from around the world on the establishment of the multilateral ICS. It will have been the first meeting at government-to-government level on this initiative since the ICS was first proposed by the Commission in its Concept Paper of May 2015. For the multilateral ICS to succeed in the way envisioned by the Commission, broad global support will be required.

The CETA will be provisionally applied in advance of its ratification. However, as discussed below, provisional application will not extend to certain of the substantive investor protections, nor to the ICS. The exclusion of certain provisions from provisional application raises a number of questions as to how the agreement will operate in practice. 

Interestingly, whilst the UK has indicated that it intends to provisionally apply the CETA, the exclusion of the ICS from the provisional application has been described by the UK Government as its "main ask" of the EU in this context. The UK Government has also concluded that, even though CETA is being put forward as a "mixed agreement" and ratified by all the Member States, the UK will not automatically benefit from CETA's provisions after the UK leaves the EU.

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ICC report on financial institutions and international arbitration: a condensed overview of a gradually changing landscape

This autumn, the ICC Commission on Arbitration and ADR published a report on Financial Institutions and International Arbitration (the "Report"). The Report offers a detailed analysis of the use of international arbitration in specialist sectors of the banking and finance industry, from derivatives and sovereign finance to advisory matters and asset management. The Report is based on interviews with over 50 financial institutions from across the globe, data received from 13 arbitration institutions and a review of relevant awards, internal policies and scholarly writing. Overall, the Report finds that despite a recent gradual shift towards more arbitration in the finance and banking industry, the use of arbitration by financial institutions remains limited. It concludes that this appears to be due to a lack of awareness of the benefits of international arbitration, combined with the traditional view that arbitration does not meet the needs of specialist financial disputes. In order to tackle these two findings, the Report seeks to give specific recommendations on how to tailor arbitration to the needs of the finance industry.

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Middle East arbitration highlights from 2016 and future trends for 2017

The last 12 months have seen a number of important developments in arbitration practice in the Middle East, some comforting to the arbitration community, some controversial. Here, we present a summary of the key themes from 2016, and give our thoughts on what to expect in 2017.

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Arbitration in India: a pro-arbitration approach?

Nick Peacock, Head of the India Disputes practice at Herbert Smith Freehills speaks with Moazzam Khan (Co-head International Dispute Resolution Practice at Indian law firm, Nishith Desai Associates) to discuss the current approach taken by the Indian courts towards arbitration. 

Nick and Moazzam discuss the arbitrability of certain types of disputes in India. They also look at the question of delay in the Indian courts and the impact this can have on arbitrations where the Indian courts become involved.

For more information, please contact Nicholas Peacock, partner, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
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