Continuing our current series on doing business in China, this edition discusses the viability of arbitration as a method of resolving disputes. 

This article highlights international arbitrations with a Chinese party that is decided outside China ("offshore arbitration") and international arbitrations with a Chinese party and a foreign party that is decided in China ("foreign related domestic arbitration"). Specifically, we discuss the enforceability of offshore arbitration awards and the viability of foreign related domestic arbitration in China.

Enforceability of offshore arbitration awards

As discussed in our last article, one of the attractions of parties agreeing to arbitrate is the willingness of Chinese courts to enforce offshore arbitration awards. This is in contrast to China's general unwillingness to enforce foreign court judgments other than in very narrow circumstances.

Along with 156 other signatory states, China is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"), a treaty some see as the pillar of the international arbitration system. In essence, it allows parties to apply to enforce an award rendered in one signatory state in another, and it limits the grounds to challenge the enforcement of such foreign arbitration awards. It offers parties the ability to choose a neutral territory, expert arbitrators, less costly procedures and bureaucratic hurdles to resolve disputes through an alternative dispute resolution forum safe in the knowledge that if enforcement is later required in China, the chances of successful enforcement is relatively high. For example, available data reveals that in 2014, of the 178 applications submitted to Chinese courts to recognise and execute offshore arbitration awards in China (including awards from Hong Kong, Macao and Taiwan), only 4 cases were refused for ratification and execution [1].

In part, the high enforcement rate is likely to be the result of an internal Chinese court reporting mechanism requiring courts which refuse to recognise or enforce offshore arbitration awards to report such ruling to the relevant higher court. If the higher court concurs with the ruling of the lower court, the higher court shall in turn report its finding to the Supreme People's Court (China's highest court). Only if the Supreme People's Court upholds the higher court finding will the application not be enforced. This regime serves as a "check-and-balance" mechanism to detect and deter Chinese courts in general from wrongly refusing to recognise and enforce offshore arbitration awards.

Care is needed to ensure offshore arbitral awards are upheld by Chinese courts

In line with the New York Convention, Chinese courts can refuse to recognise and/or enforce an offshore arbitration award on specific grounds, such as:

  • the parties were under some incapacity or the arbitration agreement is invalid;
  • the losing party was not provided with sufficient notice about the arbitration or was unable to properly present its case;
  • the award dealt with issues not contemplated by or not falling within the jurisdiction of the arbitration;
  • the composition of the arbitral tribunal or the arbitral procedure was unlawful or against the parties' agreement;
  • the award has yet to become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made;
  • the subject matter of the dispute is not capable of settlement by arbitration under Chinese laws; or
  • the recognition or enforcement of the award would be contrary to China's public policy.

However, one way to avoid the possibility of an offshore arbitration decision not being recognised and enforced in China is to consider arbitration in China.

CIETAC as a forum for foreign related domestic arbitration

As an alternative to conducting offshore arbitration and then applying to a Chinese court to enforce the offshore arbitration award, one may also consider arbitrating in China.

China is still a less sophisticated arbitral hub to the other renowned players in the Asia region such as Hong Kong and Singapore. Nonetheless, China is certainly no stranger to arbitration. In fact, in 2016, 251 arbitration institutions in China accepted and arbitrated 208,545 cases[2].

There are many domestic arbitral institutions in China and a small number are gaining popularity with foreign parties. One such institution is the China International Economic and Trade Arbitration Commission (or "CIETAC") which accepts international, foreign related and domestic arbitration cases.

CIETAC accepted 2,181 cases in 2016, of which 22% were foreign related. These cases covered a wide variety of issues, including general sale of goods contract (21%), service agreement disputes (11%), as well as real estate/construction and equity investment (each comprised 8%)[3]. Critically, CIETAC will hear cases in languages other than Chinese (or bilingual) and there is a push to attract foreign arbitrators. Currently approximately 30% of its arbitrators are foreigners.

There are two potential benefits to consider when evaluating a foreign related domestic arbitration with CIETAC. First, they are relatively quick. The average time from raising a claim to the end of the substantive hearing is six months. Second, CIETAC claims that around 90% of its awards are honoured by the parties, and fewer than one in a thousand CIETAC awards have been annulled or their enforcement rejected in China[4].

Some points to note if parties choose arbitration in China

In China, an arbitration clause may be held invalid if it does not specifically set out the arbitration institution. A contract stipulating both litigation and arbitration may render the arbitration clause void. There is, of course, always a danger of a contract or part of a contract being held invalid if the contract does not clearly define the intention of the parties.

Importantly, China does not recognise ad hoc (i.e. non-institutional) arbitration taking place in China. In contrast to institutional arbitration, an ad hoc arbitration is not administered by an institution and the arbitration parties must determine by themselves the arbitration procedures, rules and the appointment of arbitrators, among other tasks.

In addition, it is not recommended to use international arbitral institutions in China such as the International Chamber of Commerce, International Court of Arbitration, or London Court of International Arbitration. Instead, it is recommended to use the more international Chinese institutions, such as CIETAC, the Beijing Arbitration Commission or the Shanghai International Arbitration Centre.

If parties fail to agree on the language to conduct the arbitration proceeding, Chinese shall prevail. However, CIETAC may designate another language depending on the circumstances of the case. Parties may also select arbitrators not registered with CIETAC if CIETAC approves of such selection. Parties may also modify CIETAC arbitrations rules unless the modification conflicts with mandatory laws applicable to the arbitral proceedings.

Conclusion

The use of arbitration generally can be a strategically useful dispute resolution tool for international contracts with a Chinese party. While there are a number of arbitration hubs to consider during negotiation, it should be remembered that Chinese arbitration institutions are maturing and with careful drafting of any arbitration clause Chinese arbitration institutions like CIETAC may be a viable choice for administrating arbitration in China.

Footnotes:

[1] China International Economic and Trade Arbitration Commission's 2014 Annual Report on Commercial Arbitration (Executive Version).
[2] For comparison, in 2016 the International Chamber of Commerce International Court of Arbitration accepted 966 cases, and the Hong Kong International Arbitration Centre accepted 262 cases. China International Economic and Trade Arbitration Commission's 2016 Annual Report on Commercial Arbitration.
[3] Ibid.
[4] Data found on CIETAC's website at http://www.CIETAC.org.cn/index.php?m=Page&a=index&id=34&l=en