SOUTH CHINA INTERNATIONAL ARBITRATION CENTER (HONG KONG) ARBITRATION RULES COME INTO FORCE

South China International Arbitration Center (Hong Kong) (SCIAHK) is a new Hong Kong registered arbitral institution. It is affiliated to the Shenzhen-based Shenzhen Court of International Arbitration (SCIA, also known as South China International Economic and Trade Arbitration Commission), but operates as an independent institution. SCIAHK’s Board recently approved the South China International Arbitration Center (Hong Kong) Arbitration Rules (the Rules), which came into force on 1 May 2022.

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Key Changes under Revised Draft of PRC Arbitration Law

As reported in an earlier post, the Ministry of Justice of the PRC released proposed revisions to the PRC Arbitration Law (AL) for public consultation on 30 July 2021.  In this post, we look in more detail at the key changes in the revised draft.

Mainland courts, particularly in Beijing and other large cities, have long demonstrated their support for best practice in international arbitration. Mainland institutions have modernised their rules to reflect international best practice. The AL, however, was promulgated in 1994 and lacks many of the concepts and powers that are fundamental to modern arbitral legislation. These include kompetenz-kompetenz doctrine, power for tribunals to grant interim relief, and the concept of a legal seat of arbitration. In addition, it is still unclear whether non-Chinese institutions can administer arbitrations in Mainland China.

If enacted, the proposed revisions would address these lacunae and bring Mainland China fully into line with other leading arbitral jurisdictions

(1) General principles

Article 10 of the revised draft provides that the PRC courts will “support and supervise” arbitration.  Articles 4, 29 and 30 further propose the following principles:

  • parties to arbitration should be treated equally and provided with opportunities to fully present their cases (Article 29);
  • undue delay and expense should be avoided in arbitral proceedings (Article 30); and
  • arbitral proceedings should be conducted in good faith (Article 4).

The principle of conducting arbitration in good faith is further enshrined in Articles 21(2) and 33 of the revised draft.  Article 21(2) provides that if a party does not raise an objection to the existence of the arbitration agreement, that party will be deemed to have entered into the arbitration agreement; Article 33 provides that if a party is aware of any procedural irregularity but does not timely raise any objection in writing and continues to participate in the arbitration, that party will be deemed to have waived its right to raise any objection. Akin to the principle of estoppel, Articles 21(2) and 33 prevent parties from raising jurisdictional or procedural objections at a later stage (e.g. in the enforcement stage or the set-aside proceedings) if they did not raise the objections in the course of the arbitration.

In addition, the revised draft seeks to adapt to the post-COVID-19 era by allowing electronic methods of serving arbitration documents (Article 34) and conducting arbitration proceedings (Article 30).  All above-discussed articles are newly proposed in the revised draft.

(2) Foreign arbitral institutions permitted to “conduct foreign-related arbitration business”

Article 12 of the revised draft provides that foreign arbitral institutions may set up offices in Mainland China to “conduct foreign-related arbitration business”.  Although no clarification is provided in the revised draft as to what this term means precisely, it has been widely considered that this article would allow foreign arbitral institutions to administer arbitration cases in Mainland China, which is currently not allowed except for certain designated areas such as Shanghai’s Lin-gang free trade zone. The scope of case administration services to be provided by foreign institutions will be limited to foreign-related arbitration cases, and not include purely domestic cases.

In this connection, the revised draft also replaces the term “arbitration commission(s)” with the term “arbitral institution(s)”. The AL uses the term “arbitration commission(s)”, a specific name for Mainland Chinese arbitral institutions, as the legislators had only intended to cover domestic institutions without envisaging that foreign institutions might also operate in Mainland China. In order to introduce the ground-breaking change of allowing foreign institutions to operate in Mainland China, the revised draft adopts the term “arbitral institution(s)” throughout, which refers to both domestic arbitration commissions and foreign arbitration institutions.

(3) Seat of arbitration

While the PRC judiciary has already adopted this approach in practice, the concept of a “seat of arbitration” is not expressly recognised under the current AL. The revised draft expressly recognises this concept and adopts the term “seat of arbitration”.

According to the revised draft, if the parties failed to agree on the seat of the arbitration, the seat should be “the location of the arbitral institution” (Article 27); However, in case of a foreign-related arbitration, the seat may be determined by the arbitral tribunal having regard to the circumstances of the case (Article 91). Based on the proposed texts, there appears to be two possible interpretations: (1) Article 27 applies to domestic arbitration whereas Article 91 applies to foreign-related arbitration; (2) Article 91 applies to ad hoc foreign-related arbitration only, whereas Article 27 applies to both domestic arbitration and institutional foreign-related arbitration. The first interpretation is more in line with international practice in our view, and hopefully this ambiguity could be clarified in later versions of the revised draft.

Article 27 of the revised draft further provides that arbitral awards shall be deemed to have been made at the seat of the arbitration.

(4) Arbitration agreements and kompetenz-kompetenz doctrine

The revised draft proposes a number of important changes to the current AL with respect to the issue of validity of arbitration agreements.

First, under the current AL, a valid arbitration agreement must contain three basic elements: (1) an intention to arbitrate; (2) matters for arbitration; and (3) designated arbitration commission. An ambiguous arbitration agreement based on which an arbitration commission cannot be ascertained will be deemed invalid.  The revised draft significantly relaxes the requirement. According to Article 21 of the revised draft, the only necessary element for a valid arbitration agreement is an intention to arbitrate. Article 35 further provides that if the parties are unable to ascertain an arbitral institution pursuant to their agreement or the adopted arbitration rules, then the first institution that accepts the case administers the case.

Second, the revised draft establishes the kompetenz-kompetenz doctrine which allows arbitrators to determine their own jurisdiction. Under the current AL, an application to challenge the validity of the arbitration agreement may be made either to the arbitration commission or a competent PRC court, and the court’s decision shall prevail if applications are made to both the arbitration commission and a PRC court. The revised draft abandons this mechanism and, in line with the international practice and UNCITRAL Model Law, provides that the tribunal has the power to decide on its own jurisdiction (Article 28). The draft further provides that the tribunal’s decision may be reviewed by a competent PRC court and, if the court decides that the arbitration agreement is invalid or the tribunal does not have the jurisdiction, either party may apply to a higher level court for a second-level review (Article 28).

Third, Article 90 of the revised draft clarifies that the law governing the validity of the arbitration agreement is, in the following order: (1) the law agreed by parties to apply to the arbitration agreement; (2) the law of the seat; (3) the PRC law.

(5) Appointment of Arbitrators

The following changes have been proposed in the revised draft with respect to the appointment of  arbitrators:

  • parties to arbitration are permitted to select arbitrators off the panel of arbitrators of the institution (Article 50);
  • where parties are unable to jointly appoint a presiding arbitrator, the presiding arbitrator will be jointly appointed by the co-arbitrators and, failing which, be designated by the institution (Article 51);
  • arbitrators have a duty to disclose any circumstances that give rise to reasonable doubts as to his or her independence and impartiality (Article 52). The current AL has only provided that an arbitrator must recuse himself or herself under certain circumstances but does not provide a disclosure obligation.

(6) Tribunals empowered to grant interim relief

Under the current AL, the power to grant interim relief is exclusively reserved to the PRC courts. The revised draft fundamentally changes this mechanism by granting the power to also arbitral tribunals and emergency arbitrators (Articles 43, 46 and 49). The PRC courts are required to enforce or provide assistance in the enforcement of the interim measures ordered by arbitral tribunals or emergency arbitrators (Articles 47 and 48). The revised draft further provides that: –

  • the types of interim measures include asset preservation, action preservation, evidence preservation and any other types of interim measures deemed necessary by the arbitral tribunal (Article 43);
  • asset preservation and action preservation may be granted where behaviours of one party or parties, or any other reasons, may render it impossible or difficult to enforce the award or cause losses to the other party (Article 44);
  • evidence preservation may be granted where the evidence may be destroyed or lost or become difficult to obtain in the future (Article 45);
  • arbitral tribunal should require the applicant to provide security, if it intends to grant an interim relief order (Article 47).
  • If an application is wrongfully made and thus causes damages to the other party, the applicant must be liable to compensate the loss suffered by the other party (Article 47). This article mirrors Article 105 of the Civil Procedure Law which applies to interim relief applications made to the PRC court, but it remains to be seen how it would apply to applications made to the arbitral tribunals or emergency arbitrators.

(7) Arbitral awards

While Article 55 of the AL already provides that arbitral tribunals may issue partial awards before issuing the final award, Article 74 of the revised draft further clarifies that: (1) tribunals may issue partial or interim awards; (2) parties must perform as required by the order(s) granted in any partial or interim awards; and (3) if a party fails to perform as required by the order(s) granted in a partial (but not interim) award, the other party may apply to a PRC court for enforcement.  This article clears any concerns under the current AL regarding the finality of any partial awards.

Interestingly, Articles 69 and 70 of the revised draft provide that if parties reached a settlement agreement prior to the constitution of the tribunal or before commencing an arbitration, either party may apply to the arbitral institution to form an arbitral tribunal pursuant to the arbitration agreement and ask the tribunal to enter into an award based on the contents of the settlement agreement.  These articles appear to intend to enhance the enforceability of settlement agreements and the use of other alternative dispute resolution mechanisms such as mediation.

 

(8) Grounds for setting-aside and non-enforcement of arbitral awards

The revised draft proposes a number of changes to the mechanisms for setting-aside and non-enforcement of arbitral awards. Most significantly, it seeks to unify the grounds for setting aside domestic and foreign-related awards, and to prevent the enforcement courts from reviewing issues relating to the merits or procedures of the arbitration with respect to domestic and foreign-related awards.

First, under the current AL and Civil Procedure Law, different grounds apply for setting aside domestic awards and foreign-related awards. While grounds for setting aside foreign-related awards are more aligned with the UNCITRAL Model Law, domestic awards may be subject to a more substantive review and be set aside if (1) the award is rendered based upon any falsified evidence; or (2) any material evidence which may have an impact on the decisions in the award was concealed by either party.  The revised draft removes these two grounds and unifies the set-aside grounds for domestic and foreign-related awards (Article 77).

In addition, the revised draft introduces a new ground, providing that an award may be set aside if “the award was obtained through fraudulent conduct including malicious collusion and falsifying evidence” (Article 77). This ground is also applicable to both domestic and foreign-related awards. This is understood to intend to tackle “falsified arbitrations” in China, where arbitrations were brought based on non-genuine legal relationships and falsified documents in order to damage third parties’ interests. Although this new ground does not exist under the Model Law, the circumstances it intends to tackle should, in our view, be also caught by the violation of due process ground or the violation of public policy ground provided under the Model Law.

Second, the revised draft provides that the PRC courts may refuse to enforce a domestic or foreign-related arbitral award, only if the award is “against social public interest” (Article 82).  While this appears to be inconsistent with the New York Convention, it arises from the legislators’ concern of duplicative review of arbitral awards by the PRC courts in set-aside proceedings and non-enforcement proceedings and potentially conflicting results.  This change will consolidate the power to the court hearing the set-aside applications and restrict the power of the enforcement court.

Other important changes introduced by the revised draft regarding set-aside and non-enforcement procedures include:

  • the time limit for applying to set aside an arbitral award has been shortened from six months to three months, from the date of receipt of the award (Article 78);
  • the revised draft confirms that the PRC courts may partially set aside an arbitral award, which is the approach already followed by the courts in judicial practice (Article 77);
  • the revised draft stipulates the specific circumstances under which the courts may remit the case for re-arbitration (Article 80);
  • the revised draft confirms third parties’ right to object to the enforcement proceedings if the proceedings affect the third party’s legitimate rights and interests (Article 84). This was already provided in the PRC Supreme Court’s judicial interpretations and is now confirmed in the revised draft of the AL.

(9) Ad hoc arbitration permitted for foreign-related commercial disputes

Chapter 7 of the revised draft of the AL contains special provisions for foreign-related arbitrations.  A key change proposed in Chapter 7 of the revised draft is permitting ad hoc arbitration for “commercial disputes involving foreign-related elements” (Article 91).  Ad hoc arbitration is currently not permitted under the AL for any arbitrations seated in Mainland China.  The revised draft further provides that parties to ad hoc arbitrations may jointly appoint an arbitral institution as the appointing authority, failing which a competent PRC intermediate people’s court may designate an arbitral institution as the appointing authority (Article 92).  Furthermore, the arbitral tribunals appointed in ad hoc arbitrations are required to file the original award and the record of service of the award with the intermediate people’s court of the seat of the arbitration (Article 93).

For further information, please contact Weina Ye, International Partner, Helen Tang, Partner, Eric Xu, Trainee Solicitor or your usual Herbert Smith Freehills contact.

Weina Ye
Weina Ye
International Partner
+86 21 2322 2132
Helen Tang
Helen Tang
Partner
+86 21 2322 2160
Eric Xu
Eric Xu
Trainee Solicitor
+86 21 2322 2102

Ministry of Justice publishes revised draft PRC Arbitration Law

On 30 July 2021, the Ministry of Justice (MoJ) of the PRC released proposed revisions to the PRC Arbitration Law for public consultation.  The MoJ also published explanatory notes to the Revised Draft.

The PRC Arbitration Law was promulgated in 1994 and has been in force for 26 years without substantial amendment.  With the rapid economic expansion over the past decades in Mainland China, the Arbitration Law has, in many respects, become disconnected from both economic reality and international practice.  In 2018, the MoJ started the revision process, which led to the publication of the Revised Draft on 30 July.

The Revised Draft signals a range of ground-breaking changes to the existing arbitration regime in Mainland China.  For example:

  • Foreign arbitration institutions will be expressly permitted to establish business operations in Mainland China to “conduct foreign-related arbitration business”;
  • Ad hoc arbitration, which is not currently permitted in Mainland China, will be permitted for “foreign-related commercial disputes”;
  • The Law will expressly recognise that the nationality of arbitral awards is determined by the seat of the arbitration. While the PRC judiciary has adopted this approach in practice, the concept of a “seat” of arbitration is not expressly recognised under the current PRC Arbitration Law.
  • The kompetenz-kompetenz doctrine, which does not exist under the current Arbitration Law, will finally be recognised. This principle allows arbitrators to determine their own jurisdiction over a claim;
  • Arbitral tribunals will be empowered to grant interim measures. Currently, this power is reserved to the PRC courts.

These are all welcome changes, which would bring Mainland China’s arbitral regime further into line with international best practice.

We will provide a more detailed summary of the key changes proposed in a later blogpost.

For further information, please contact Helen Tang, Partner, Weina Ye, International Partner, Stella Hu, Senior Consultant, Kathryn Sanger, Partner or your usual Herbert Smith Freehills contact.

Helen Tang
Helen Tang
Partner
+86 21 2322 2160
Weina Ye
Weina Ye
International Partner
+86 21 2322 2132
Stella Hu
Stella Hu
Senior Consultant
+852 21014248
Kathryn Sanger
Kathryn Sanger
Partner
+852 21014029

PRC court sets aside cryptocurrency award on public interest grounds

Shenzhen Intermediate People’s Court has ordered that an arbitral award made by Shenzhen Arbitration Commission (also known as Shenzhen Court of International Arbitration) be set aside on the ground that awarding damages in US dollars in lieu of crypto is against the public interest.

(2018) Yue 03 Min Te No. 719 or (2018) 粤03民特719号

Background

The 2nd Respondent (Li) commissioned the Applicant (Gao) to conduct cryptocurrency wealth management. Gao failed to return the relevant assets and profits to Li. Gao, Li and the 1st Respondent (Yunsilu Fund) then entered into a share transfer agreement (Agreement), whereby the parties agreed that: (1) Yunsilu Fund should transfer a 5% share in a company to Gao at a consideration of RMB 550,000 (Consideration); (2) Li should pay RMB 300,000 to Yunsilu Fund on behalf of Gao as part of the Consideration and Gao should pay the remaining RMB 250,000 to Yunsilu Fund directly; and (3) Gao should return the relevant crypto assets (20.13 Bitcoin, 50 Bitcoin Cash, and 12.66 Bitcoin Diamond) to Li.

Gao failed to perform his obligation under the Agreement. Yunsilu Fund and Li commenced arbitration proceedings against Gao at the Shenzhen Arbitration Commission. They asked the tribunal to order that (1) the shares be transferred to Gao; (2) Gao pay RMB 250,000 to Yunsilu Fund; (3) Gao pay the US dollar equivalent of the crypto assets to Li, plus interest; and (4) Gao pay damages of RMB 100,000.

The arbitral tribunal found that Gao had failed to deliver crypto as agreed by the parties (who considered that such crypto had property value). This constituted a breach of contract and merited an award of damages. The tribunal referred to public information about the closing price of Bitcoin and Bitcoin Cash at the agreed date of contractual performance, and estimated the loss at US$401,780. The tribunal ordered that (1) the shares be transferred to Gao, (2) Gao pay RMB 250,000 to Yunsilu Fund, (3) Gao pay US$401,780 to Li (to be converted to RMB at the exchange rate as of the date of the award); and (4) Gao pay damages of RMB 100,000 to Li.

Gao applied to the Shenzhen Intermediate People’s Court to set aside the award.

Decision

Since this is a Chinese domestic arbitral award, the Court reviewed it in accordance with Article 58 of the PRC Arbitration Law. The main issue for determination was whether the award was against the public interest. The Court held that, according to the Circular of the People’s Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission on Preventing Risks from Bitcoin (Yin Fa [2013] No.289), Bitcoin does not have the same legal status as a fiat currency, and cannot and should not be circulated in the market as a currency. In 2017 seven authorities, including the People’s Bank of China, jointly issued the Announcement on Preventing Risks relating to Fundraising through Token Offerings to reiterate the above provision. Meanwhile, from the perspective of preventing financial risks, the Announcement further provides that any so-called “token” financing and trading platform shall not:

  1. engage in exchange business between fiat currencies and tokens or between “virtual currencies”;
  2. trade tokens or “virtual currencies” for itself or as a central counterparty; or
  3. provide pricing, information agency or other services for tokens or “virtual currencies”.

The above documents essentially prohibit the redemption, trading and circulation of Bitcoin in Mainland China, as well as speculation in Bitcoin and other activities that may amount to engaging in illegal financial activities, disturbing the financial order or affecting financial stability.

The arbitral tribunal ruled that Gao Zheyu should compensate Li Bin for the US dollar equivalent of the Bitcoin, then convert the US dollars into RMB. The Shenzhen Court ruled that this amounted to redemption and trading between Bitcoin and fiat currency in a disguised form, which contravenes the spirit of the above documents and violates the public interest. It therefore set aside the arbitral award. The Court declined to review the other grounds raised by the Applicant Gao Zheyu.

Comment

This ruling sends a clear warning that enforcing a crypto-related arbitral award may be difficult in jurisdictions, such as Mainland China, which show little tolerance for the cryptocurrency business.

Despite the fact that some Mainland Chinese courts have recognised Bitcoin as a “virtual commodity” or “virtual asset” (see (2019) Hu 01 Min Zhong No. 13689), it is important to remember that trade and exchange of cryptocurrencies (especially trading with fiat currencies) is strictly prohibited in Mainland China.

Claimants in crypto-related arbitrations with any Mainland element must take great care when framing their requests for relief. For example, if a claimant is owed crypto currency, instead of asking the tribunal to convert the debt into a fiat currency for damage calculation, the claimant may consider asking for damages to be paid in the same crypto currency to avoid any uncertainty on enforcement.

For more information, feel free to get in touch with any of the contacts below, or your usual Herbert Smith Freehills contact.

Helen Tang
Helen Tang
Partner
+86 21 2322 2160
Antony Crockett
Antony Crockett
Senior Consultant
+852 21014111
Briana Young
Briana Young
Professional Support Consultant
+852 21014214

China’s top court publishes its first annual report on judicial review of arbitration-related cases

On 23 December 2020, the Supreme People’s Court (“SPC”) of China released its bilingual 2019 Annual Report on Judicial Review of Arbitration Cases in China (the “Report”). It is the very first report issued by the SPC summarising the courts’ approach for judicial review of arbitration-related cases.

The Report aims to promote the SPC’s efforts over the course of last year in standardising judicial review approach in dealing with arbitration-related matters. In particular, it includes the SPC’s summary of its approach for judicial review of arbitration-related matters in 2019, such as on issues of validity of arbitration agreements, enforcement or revocation of domestic arbitral awards, as well as recognition and enforcement of offshore arbitral awards. Whilst the full content of the Report itself has not been made available online at the time of our blog, we set out below the key highlights based on the press release and information provided at the press conference of the SPC.

The SPC “reporting system”

The SPC “reporting system” applies to enforcement of arbitral awards in Mainland China.[i] Under the reporting system, lower courts are authorised to confirm validity of arbitration agreements, and order enforcement of onshore and offshore awards (or a Mainland Chinese foreign-related award). However, if a lower court is minded to deny validity of an arbitration agreement or to refuse enforcement of an arbitral award, it must refer the case to a higher court to confirm the decision.

For domestic awards, the higher court will conduct the final review without involving the SPC unless where (1) the parties are from different provinces in Mainland China; or (2) the refusal to enforce the award is based on an “infringement of public policy”.

For foreign-related arbitration cases, the higher court must refer the matter to the SPC for a final decision if it agrees that enforcement should be refused.

In 2018, the reporting system was further supplemented by the establishment of the First and Second International Commercial Courts.[ii] These courts are empowered to hear revocation and enforcement cases of foreign-related arbitral awards with disputed amounts exceeding RMB300 million or awards of significance released by five arbitration institutions.[iii]

According to the statistics provided by the SPC at the press conference, PRC courts heard a total of 11,029 cases concerning revocation of arbitral awards in 2019, only 5.8% of which the courts decided to set aside or partially set aside arbitral awards. Among the 201 cases reviewed by the SPC in 2019, 32% of lower courts’ decisions were overruled.

Recognition and enforcement of offshore arbitral awards

Recognition and enforcement of offshore arbitral awards in China is governed by the New York Convention as well as the Civil Procedure Law of China.

The SPC mentioned during the press conference that in 2019, a total of 32 applications were made to recognise and enforce offshore arbitral awards in China, among which 20 applications were successful and 1 application was denied because the award exceeded the scope of the arbitration agreement. The other applications were either withdrawn by the parties or dismissed due to lack of jurisdiction.

Interim injunctions in support of arbitration

The Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region (the “Arrangement”) came into effect on 1 October 2019. Parties to Hong Kong-seated arbitrations administered by an eligible arbitration institution in Hong Kong have the right to apply for interim measures from Mainland Chinese courts.

According to the SPC, between 1 October 2019 and 31 October 2020, 32 applications for interim measures have been granted by Mainland Chinese courts in relation to Hong Kong arbitration, among which 29 cases concern property preservation measures, two cases concern evidence preservation and one case concerns action preservation.

Pro-arbitration principles in judicial review

SPC mentioned at the press conference that the Report summarises the criteria and principles that Mainland Chinese courts should take into account in their judicial review of arbitration-related cases.

Six general principles are emphasised:

  • Courts shall respect parties’ agreement to arbitrate and interpret the arbitration agreements/clauses in favour of validity;
  • The grounds for setting aside arbitral awards shall be strictly limited to those provided by law;
  • Arbitration awards are in principle final and binding and the judicial review of arbitral awards shall only be limited to the extent of necessity;
  • The public policy defence shall be interpreted stringently to avoid being abused;
  • Courts shall accurately identify foreign governing laws, recognise and enforce foreign arbitral awards accordingly to law and create an “arbitration friendly” judicial environment; and
  • Courts shall recognise and enforce Hong Kong, Macau and Taiwan arbitral awards according to law, and assist in interim measures in aid of Hong Kong arbitral proceedings in Mainland China.

According to the SPC, the Report also addresses recent development in arbitration practice, such as the formation of Belt and Road Mechanism for Resolution of International Commercial Disputes[iv] and China Pilot Free Trade Zone Arbitration Mechanism[v].

 

[i]           See the Provisions of the Supreme People’s Court on Issues concerning Applications for Verification of Arbitration Cases under Judicial Review (Fa Shi [2017] No.21).

[ii]          See Article 2 of Provisions of the Supreme People’s Court on Several Issues Regarding the Establishment of International Commercial Court (Fa Shi [2018] No.11).

[iii]         The five arbitration institutions are members of “One-stop” Diversified Settlement Mechanism for International Commercial Disputes in China, including China International Economic and Trade Arbitration Commission, Shanghai International Economic and Trade Arbitration Commission, Shenzhen Court of International Arbitration, Beijing Arbitration Commission, and China Maritime Arbitration Commission.

[iv]         Opinions of the Supreme People’s Court on the Provision of Judicial Services and Guarantee by People’s Courts for the Belt and Road Initiative (Fa Fa [2019] No.29) (Chinese text only).

[v]          Opinions of Supreme People’s Court on the Provision of Judicial Services and Guarantee by People’s Courts for the Construction of China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area (Fa Fa [2019] No. 31).

 

Helen Tang
Helen Tang
Partner
+86 21 2322 2160
Celine Wang
Celine Wang
Senior Associate
+86 21 2322 2159
Stella Hu
Stella Hu
Senior Consultant
+852 2101 4248

PRC court clarifies enforcement of Mainland award made by foreign institution

On 6 August 2020, Guangzhou Intermediate People’s Court made a civil ruling that an arbitral award made in Guangzhou by the ICC should be regarded as a Chinese arbitral award with a foreign element. It follows that the award should be enforced under Article 273 of the PRC Civil Procedure Law, rather than under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

(2015) Sui Zhong Min Chu Si Zi No. 62 or (2015)穗中法民四初字第62号

Background

This case concerned a supply contract between Brentwood Industries (US) as the seller, Guangzhou Faanlong Machinery Engineering Co Ltd (PRC) as the buyer, and Guangzhou Zhengqi Trading Co Ltd (PRC) as the agent of the buyer. Article 16 of the contract provided that “any dispute arising from or in connection with this contract shall be settled through friendly negotiation. If no settlement can be reached through negotiation, it shall be submitted to ICC for arbitration in the place where the project is located in accordance with international convention and practice” (emphasis added). Article 17 provided that “the applicable law of this contract is PRC law”. In this case, the project was located in Guangzhou, Mainland China.

On 16 December 2010, Brentwood brought a claim against Faanlong and others (Respondents) in the Court. The Court declined to hear the case, as there was an arbitration agreement between the parties. On 9 May 2011, Brentwood applied to the Court to invalidate the arbitration clause. Brentwood was not successful. Subsequent to the Court’s ruling confirming the validity of the arbitration clause, on 31 August 2012, Brentwood commenced ICC arbitration against the Respondents. The arbitration was administered by the ICC through its Secretariat Asia Office based in Hong Kong. On 17 March 2014, the sole arbitrator made a final award in favour of Brentwood. On 13 April 2015, Brentwood applied to the Court for recognition and enforcement of the award.

The Court’s ruling on enforcement

Brentwood argued that judicial practice in Mainland China is that the nationality of the arbitral award is determined by the place where the arbitration institution is located. Accordingly, as the award was made by the ICC, which is headquartered in Paris, it should be recognised and enforced in Mainland China in accordance with the New York Convention. Alternatively, if the Court considered that the award was made by the ICC Secretariat Asia Office based in Hong Kong, the award is a Hong Kong arbitral award and should be recognised and enforced in accordance with the Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong Special Administrative Region (Mainland and Hong Kong Mutual Arrangement).

The Respondents argued that (1) the award was not “made in the territory of a State other than the State where the recognition and enforcement of such awards are sought “ (Article 1 of the New York Convention), and thus should not be recognised and enforced under the New York Convention; (2) ICC was not an arbitration institution stipulated in the PRC Arbitration Law and it was not legal for it to administer arbitration in Mainland China; and (3) the validity of the arbitration clause and the enforceability of the arbitral award were two separate legal issues under different rules. The fact that the arbitration clause was held valid did not necessarily suggest that the award made pursuant to it was enforceable.

The Court ruled that the award, made in Guangzhou by the ICC, should be regarded as a foreign-related arbitral award made in Mainland China. Enforcement of the award should be brought under Article 273 of the PRC Civil Procedure Law. It rejected Brentwood’s arguments for recognition and enforcement under the New York Convention or the Mainland and Hong Kong Mutual Arrangement and directed Brentwood to re-apply for enforcement under the PRC Civil Procedure Law.

Comment

It is a long-standing question whether foreign arbitration institutions can administer arbitration seated in Mainland China under the current PRC Arbitration Law regime. The traditional view was no, because “arbitration commission” in the PRC Arbitration Law meant Chinese arbitration institutions only. However, with the increase in commercial dealings between Chinese and foreign parties, the strict interpretation of the law no longer sits well with the demands of commercial parties. China’s Supreme People’s Court has recently, in several cases and judicial interpretations, confirmed the validity of clauses providing for arbitrations administered by foreign institutions seated in Mainland China. This latest decision made by the Guangzhou Court took a further step, supporting that the arbitral award made in arbitration seated in Mainland China and administered by a foreign arbitration institution can be enforced under PRC Civil Procedure Law. However, as Mainland China is not a case law jurisdiction, this latest decision by Guangzhou Court, even though it should have been vetted by the Supreme People’s Court via the internal reporting system, is not a binding authority in Mainland China.

Viewed in light of the fact that foreign arbitral institutions are now permitted to operate in Beijing and extended free trade zones in Shanghai (see here), we are hopeful that there will be a final clarification in the near future on the question of whether foreign arbitral institutions can administer arbitration seated in Mainland China. Legal practitioners in Mainland China have been calling for an amendment to the existing PRC Arbitration Law to address this issue. If that happens, it would be a significant step towards China further opening up its legal services market to foreign players. Having said that, before that final missing piece of the puzzle is complete, we would recommend that parties avoid agreeing to an arbitration clause that provides for arbitration seated in Mainland China to be administered by a foreign arbitral institution.

If you have questions or would like discuss any aspect of this post, please contact Helen Tang, Stella Hu or Briana Young of Herbert Smith Freehills, Weina Ye of Kewei Law Firm, or your usual Herbert Smith Freehills contact.

Helen Tang
Helen Tang
Partner, Shanghai
+86 21 2322 2160
Weina Ye
Weina Ye
International Partner, Kewei
+86 21 2322 2132
Stella Hu
Stella Hu
Of Counsel, Beijing
+86 10 65355017
Briana Young
Briana Young
Professional Support Consultant, Hong Kong
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Beijing to open to foreign arbitral institutions

On 7 September 2020, the State Council of China published a policy paper on opening up the services sector in Beijing (“Work Plan for Deepening Comprehensive Pilot and New Round of Opening-Up of Services Sectors in Beijing and Building Comprehensive Demonstrative Area of Opening-up of State Services Sectors” or《深化北京市新一轮服务业扩大开放综合试点建设国家服务业扩大开放综合示范区工作方案》). The paper announces  that foreign arbitral institutions will be allowed to set up “business organisations in designated area(s) in Beijing”, to “provide arbitration services in relation to civil and commercial disputes arising in the areas of international commerce and investments” and to “support and secure the application and enforcement of interim measures … before and during the arbitration proceedings, such as asset preservation, evidence preservation and action preservation” (emphasis added).

For these purposes, a “foreign arbitral institution” is one that is established outside Mainland China, including in Hong Kong, Macao or Taiwan.

The paper does not explain  the exact scope of activities that business organisations will be entitled to carry out in Beijing.  They might be permitted, for example, to organise arbitration hearings in venues in Beijing, or even to provide case administration services from Beijing.  This is one step further from an earlier policy under a 2017 State Council policy paper (“Reply of the State Council in relation to Deepening Reform and Further Opening-up of Services Sectors in Beijing as Comprehensive Pilot” or 《国务院关于深化改革推进北京市服务业扩大开放综合试点工作方案的批复》), which allowed foreign arbitral institutions to “establish representative offices in Beijing” (emphasis added). No foreign arbitral institution has set up offices in Beijing following the 2017 policy.

The State Council of China previously released similar policies in Shanghai’s free trade zone. In 2015, a State Council policy paper allowed foreign arbitral institutions to open representative offices in Shanghai’s free trade zone.  Subsequently, HKIAC, SIAC and ICC have opened representative offices in Shanghai. These offices, however, have been limited to liaison activities and have not been permitted to provide case administration services in Mainland China.

In August 2019, a further State Council policy paper stated that foreign arbitral institutions may be permitted to set up business organisations in Shanghai’s extended free trade zone to “conduct arbitration businesses in relation to civil and commercial disputes arising in the areas of international commerce, maritime affairs, investment, etc.” (emphasis added) (see here). It has been reported that several foreign arbitral institutions are in the process of setting up branches in the extended free trade zone under the August 2019 policy paper, although it remains to be seen which types of “arbitration businesses” those branches will be permitted to conduct.

It is worth noting that both the August 2019 Shanghai policy paper and the September 2020 Beijing policy paper mention that foreign arbitral institutions’ branches will be allowed “to support the application and enforcement of interim measures” in Mainland China. Under current Chinese law, parties to arbitration cases must apply to Chinese courts for interim measures; Mainland China-seated arbitral tribunals are not allowed to grant interim relief. However, Chinese courts generally do not accept interim relief applications from parties to arbitrations administered by foreign arbitral institutions (except for cases administered by designated Hong Kong arbitration institutions and seated in Hong Kong, see here), as there is currently no legal ground supporting this. The two policy papers appear to have allowed this possibility, but it remains unclear whether this is the correct interpretation and, if so, how it will be implemented in practice.

The latest Beijing policy paper, following the path of previous policy papers, signals further liberalisation and opening up of commercial arbitration practice in Mainland China. However, under the current Chinese Arbitration Law, foreign arbitral institutions are still not expressly permitted to administer arbitration cases seated in Mainland China.

For this reason, we continue to recommend against providing for arbitration of foreign-related disputes seated in Mainland China administered by an foreign arbitral institution (see here).

If you have questions or would like discuss any aspect of this post, please contact Helen Tang or Briana Young of Herbert Smith Freehills, Weina Ye of Kewei Law Firm, or your usual Herbert Smith Freehills contact.

Helen Tang
Helen Tang
Partner, Shanghai
+86 21 2322 2160
Weina Ye
Weina Ye
International Partner, Kewei
+86 21 2322 2132
Briana Young
Briana Young
Professional Support Consultant, Hong Kong
+852 2101 4214

HERBERT SMITH FREEHILLS UPDATES ESSENTIAL GUIDE TO DISPUTES CLAUSES IN CHINA CONTRACTS

Herbert Smith Freehills has launched the 8th edition of its guide, “Dispute resolution and governing law clauses for China-related commercial contracts‎”.

Better known as “The Dragon Book“, this practical guide explains how Mainland Chinese law affects parties’ choice of law and dispute resolution in China-related contracts.‎

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CIETAC tribunal applies UNIDROIT Principles where parties fail to present case under governing law

While commercial parties are generally free to select the law that governs their contracts, they must also ensure that they understand the law they selected, and can actually apply that law to the contract.  In a CIETAC arbitral award published by CIETAC in its publication “Selection of Arbitration Cases Involving the Belt and Road Countries”, a sole arbitrator came up with a creative solution in a situation where the parties failed to present their cases under the governing law of the contract.  The arbitrator applied the UNIDROIT Principles of International Commercial Contracts to determine the legal issues in dispute.  Despite this arbitrator’s willingness to “think outside of the box”, the case is a reminder that parties must consider the legal and practical implications of their contractual choices.

Background

On 24 September 2012, the Indonesian Respondent EPC contractor entered into an EPC Sub-Contract (Agreement) with the Mainland Chinese First Claimant and Indonesian Second Claimant to build a coal-fired power plant located in Indonesia.  The governing law of the Agreement was Singapore law and disputes were referred to arbitration at the China International Economic and Trade Arbitration Commission (CIETAC).

The Project was stayed at the preliminary design stage.  The Claimants contended that the Respondent had failed to provide permanent use of the road to access the Project’s site and failed to provide location details of the main entrance of the Project, which resulted in the Claimants’ delay in providing the preliminary design drawings to the Respondent.  The Respondent in return blamed the Claimants for their delay in submitting the preliminary design drawing within the time limits as provided under the Agreement; and called the advance payment bonds and performance bond just before the Claimants completed and submitted the preliminary design drawings.  After calling the bonds, the Respondent refused to pass the preliminary design drawing to the Employer for review and approval.  As a result, performance under the Agreement was suspended.

The Claimants commenced arbitration and sought a declaration that the Agreement was terminated due to the Respondent’s breach.  The Claimants also sought an order for the Respondent to return the called amounts of the performance bond; to return the difference between the amount of the advance payment bonds and advance payment to the Claimants; damages, and interest.

The governing law issue

The parties had expressly selected Singaporean law to govern the Agreement.   However, neither party engaged Singaporean counsel or legal experts when arguing their cases in the arbitration. The Claimants submitted their pleadings based on Chinese law.  Whilst the Respondent objected to the application of Chinese law, it merely submitted a Singaporean legal expert report with a few Singapore court cases in support, which was very limited in substance and did not touch upon the major issues in dispute.

Despite the sole arbitrator’s instructions, the parties failed to provide sufficient Singaporean legal authorities.  The sole arbitrator referred to Article 49 of the CIETAC Arbitration Rules, which provides: “[t]he arbitral tribunal shall independently and impartially render a fair and reasonable arbitral award based on the facts of the case and the terms of the contract, in accordance with the law, and with reference to international practices”, and proposed that the parties submit their cases under the UNIDROIT Principles.  If any party considered there was a conflict between Singaporean law and the UNIDROIT Principles, it could make submissions accordingly.   The parties accepted this solution and submitted pleadings based on the UNIDROIT Principles.

The sole arbitrator found that the Claimants had breached the Agreement by delaying the initial design drawings.  However, the sole arbitrator held that the Respondent’s response to the Claimants’ breach, by calling the bonds in full and refusing to submit the initial drawing to the Employer, had been disproportionate to the breach.  In the arbitrator’s view, the Respondent’s call on the bonds made it impossible for the Claimants to continue performing the Agreement.

In the arbitrator’s view, the Respondent’s call on the bonds therefore constituted a fundamental breach of the Agreement.  The arbitrator relied on the UNIDROIT Principles to uphold the Claimants’ claim that they were entitled to terminate the Agreement, and to determine the consequences of that termination.  The arbitrator reasoned that the UNIDROIT Principles reflect good practice and general principles in international commercial contracts.  Unless either party could demonstrate otherwise, the sole arbitrator held that he had no reason to believe there was any inconsistency between Singapore law and the UNIDROIT Principles.

Comment

In practice, many arbitrators would not proactively apply a non-binding codification of transnational legal principles to resolve a dispute where parties have explicitly chosen the governing law of the contract.  The published award does not elaborate on why the tribunal proposed applying the UNIDROIT Principles.  However, it does indicate that Chinese arbitrators may be increasingly open to applying international legal principles when dealing with foreign-related commercial disputes.

Nevertheless, this case appears to be a one-off, and it would be unwise for parties to rely on an arbitrator’s willingness to adopt creative solutions of this kind.  Parties who take advantage of the contractual freedom to select a neutral governing law must be prepared to argue their cases under that law, i.e. to instruct counsel or experts who are qualified to practice that law.  If parties do not apply the selected governing law in the arbitration, they must be prepared for the additional time and expense involved in determining which laws apply before the substantive claims can be heard, not to mention the risk of an unexpected outcome if the law applied produces an unfavourable decision.

[1] This award was published by CIETAC in the Selection of Arbitration Cases Involving the Belt and Road Countries, at pages 58 to 105.

Helen Tang
Helen Tang
Partner
+86 21 2322 2160
Jean Zhu
Jean Zhu
Counsel, Kewei
+86 10 6535 5041
Yingtong Chen
Yingtong Chen
Legal Assistant, Kewei
+86 10 6535 5133

Chinese Supreme People’s Court releases revised rules of evidence in civil proceedings and further policy paper on Shanghai’s Lin-gang Free Trade Zone

The Chinese Supreme People’s Court (SPC) issued a series of judicial interpretations and opinions in December 2019 in relation to the rules of evidence in civil proceedings and further liberalisation of litigation and arbitration practice concerning the Ling-gang Special Area of the Shanghai Pilot Free Trade Zone. In this post, we will share our thoughts on the key highlights of those judicial interpretations and opinions.

Revised rules of evidence in civil proceedings

The SPC released the revised Provisions on Evidence in Civil Proceedings (Fa Shi [2019] No.19) (New Rules) on 25 December 2019. The New Rules will come into force on 1 May 2020, replacing the old rules which have been in effect since 2002. Significant changes in the New Rules include among others the following:

Electronic data evidence

The Chinese Civil Procedure Law has recognised electronic data as a type of evidence in civil proceedings since 2012. Electronic information such as WeChat messages and online transaction records have been widely accepted by PRC courts as evidence in judicial practice.

The New Rules now formally define the scope of electronic data evidence. According to the New Rules, electronic data evidence includes a wide range of electronic information, including webpages, blogs, microblogs, text messages, instant messages, emails, user registration and authentication information, electronic transaction records, and any other types of documents and information stored, processed or transmitted in digital forms.

The courts may take into account a range of factors in determining the veracity of electronic data, including the hardware and software environment of the relevant computer system, its operating condition, and the methods that the data was stored, transmitted and extracted. There are certain situations where the courts will assume the veracity of electronic data information unless there is evidence to the contrary, including (i) where the data information was kept or submitted by a party to whom the contents of the information were unfavourable; (ii) where the data was provided or verified by an independent third party platform which stores such data; (iii) where the data was stored by way of official archive; (iv) where the data was generated during normal business operations; (v) where the data was stored, transmitted or extracted by methods agreed by the parties; and (vi) where the content of the data has been notarised by a notary public.

Disclosure of documents

Document disclosure requests traditionally were not allowed in civil proceedings in mainland China. In 2015, the SPC published the Interpretation on the Implementation of the Civil Procedure Law (2015 Interpretation) which, in Article 112, for the first time allowed parties to apply for disclosure of documents in civil proceedings as a matter of principle. However, the 2015 Interpretation does not provide detailed guidance for the parties and the courts to follow; therefore, in judicial practice, parties seldom rely on Article 112 of 2015 Interpretation to request evidence from counterparty.

The New Rules now set out detailed rules for parties and courts to follow in practice. Pursuant to the New Rules, where a party in possession of a document relied on that document in the proceedings, or created that document in favour of the other party, that document should be disclosed. Any documents that the other party is legally entitled to review or obtain, as well as any accounting books and vouchers, should also be disclosed. Where a request is not specific or is irrelevant or immaterial to the outcome of the case, or where the document requested is not within control of the other party, the court should not allow the request. The court should hear both parties’ opinions in deciding whether to grant a document request. Where a party refuses to disclose a document without justifiable reasons in breach of a court order, the court is entitled to draw adverse inferences against that party. Finally, under the New Rules, parties are entitled to request disclosure of electronic data evidence, and the rules applicable to disclosure of documentary evidence apply equally to electronic data evidence.

Factual and expert witnesses

The New Rules also made certain changes to the rules on the presentation of factual witness evidence and expert witness evidence in civil proceedings. For example, under the New Rules factual witnesses are now generally required to provide a statement of truth, both orally and in writing, to the courts. Expert witnesses (who are mostly appointed by the courts in Chinese civil proceedings) are also required to provide an undertaking to the courts that they will act objectively and impartially when accepting the appointment.

Further internationalisation of Chinese litigation and arbitration practice

In December 2019, the SPC and the Shanghai High People’s Court issued two policy papers on the Ling-gang Special Area of the Shanghai Pilot Free Trade Zone (Lin-gang FTZ) – the “Opinion on People’s Courts’ Provision of Judicial Services and Safeguard to the Development of China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area” published by the SPC on 13 December 2019 (SPC Opinion) and the “Implementing Opinion on Shanghai Courts’ Judicial Services to Safeguard the Development of China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area” published by the Shanghai High People’s Court on 30 December 2019 (Shanghai Courts Opinion).

We reported in August 2019 and November 2019 on the Chinese government’s plan on the Ling-gang FTZ and the impact on the arbitration practice. The SPC Opinion and the Shanghai Courts Opinion set out the actions to be taken by the courts to implement the plan. Although the provisions contained therein are still expressed in general terms, a number of the provisions signal further policy liberalisation or internationalisation of the litigation and arbitration practice in China. In particular, the SPC Opinion and the Shanghai Courts Opinion confirm that:

  • Registered foreign arbitration institutions will be allowed to set up businesses in Lin-gang FTZ and to “conduct arbitration businesses in relation to civil and commercial disputes arising in the areas of international commerce, maritime affairs, investment, etc.“. This has been understood to be a green light for foreign arbitration institutions to administer arbitration cases seated in mainland China. (Article 6 of the SPC Opinion and Article 9 of the Shanghai Courts Opinion)
  • Enterprises registered in Lin-gang FTZ are encouraged to submit their disputes to arbitration “in a specified location, pursuant to specified arbitration rules and by specified arbitrators“. Such wording has been understood to be an endorsement for ad hoc arbitration seated in mainland China under certain circumstances, as we reported previously. As encouraging as it might seem, the provision is still very vague and how it will apply in practice still remains to be seen. (Article 6 of the SPC Opinion)
  • Chinese courts may, upon the relevant parties’ consent, allow foreign parties to use English when participating in court proceedings concerning international commercial disputes in relation to the Lin-gang FTZ. (Article 17 of the Shanghai Courts Opinion)
  • Chinese courts will explore the possibility of hearing cases which do not have any “nexus” to mainland China and which were submitted to the Chinese courts’ jurisdiction solely based on parties’ agreement. (Article 12 of the Shanghai Courts Opinion)

 

If you have any questions or would like to discuss any aspect of this post, please contact Cathy Liu, Helen Tang, Weina Ye or your usual Herbert Smith Freehills contacts.

Cathy Liu
Cathy Liu
Partner, Kewei, Mainland China
+86 21 2322 2158
Helen Tang
Helen Tang
Partner, Mainland China
+86 21 2322 2160
Weina Ye
Weina Ye
Senior Associate, Mainland China
+86 21 2322 2132