Is China opening doors to international arbitration?

By Anne Yuan & Yuan Shen, Boss & Young
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In the past three decades, China has opened its doors to the global community and increasingly become a major player in the international marketplace. The central government’s attitude towards arbitration, especially international arbitration, is gradually becoming more liberal. This is especially apparent in the past few years, with deep reforms taking place.

Anne Yuan
Anne Yuan

The attitude of the judicial arm of the Chinese government towards international arbitration institutions is also becoming more liberal. In 2015 and 2016, the Hong Kong International Arbitration Centre (HKIAC) and the Singapore International Arbitration Centre (SIAC) set up representative offices in Shanghai. In 2013, the Supreme People’s Court (SPC) affirmed in its reply to the Anhui High People’s Court that foreign arbitration institutions are arbitration commissions under article 16 of the Arbitration Law of the People’s Republic of China.

This affirmation clarifies that it is legitimate for foreign arbitration institutions to provide their services and hold arbitration proceedings in China. The establishment of representative offices by the HKIAC and the SIAC seems to be a direct response to this clarification.

However, due to the conflict between the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Civil Procedure Law of the People’s Republic of China on nationality of arbitral awards, it is possible that arbitral awards handed down in China by foreign arbitration institutions may not be enforced in China.

In practice, the theory that the nationality of an arbitral award must be the nation where the arbitration site is located is becoming increasingly popular. In 2009, the SPC issued the Notice of the Supreme People’s Court on Issues Concerning the Execution of Hong Kong Arbitral Awards in the Mainland, where the SPC stated that an International Chamber of Commerce (ICC) arbitration award made in Hong Kong must be enforced in mainland China according to the Arrangements of the Supreme People’s Court on the Mutual Enforcement of Arbitral Awards between the mainland and the Hong Kong Special Administrative Region, and this is the governing rule for enforcement of Hong Kong arbitral awards in China.

Yuan Shen
Yuan Shen

This clearly shows that the SPC regards an ICC arbitral award as an arbitral award made in Hong Kong. Therefore, China’s judiciary is gradually taking a different view with respect to international arbitration institutions, from prohibiting their entry into the Chinese arbitration arena to opening its doors to such institutions.

In future, we can expect that the conflict between domestic law and international convention will be resolved. We can also look forward to intensive competition among domestic arbitration institutions and foreign arbitration institutions.

As a party to the New York Convention, Chinese courts are more liberal in their recognition and enforcement of foreign arbitral awards than in their recognition and enforcement of foreign judgments. However, the interpretation of domestic law and the New York Convention may affect the recognition and enforcement of foreign arbitral awards in China.

The Civil Procedure Law and the Arbitration Law provide that only disputes involving foreign-related factors may be arbitrated by a foreign arbitration institution.

In 2014, the Beijing Second Intermediate People’s Court declined to recognize and enforce a foreign arbitral award due to the invalidation of a relevant arbitration clause. The dispute was a contractual one between a domestic company and a foreign-invested company. The Beijing court held that the foreign-invested company was a Chinese legal person, and the contract was signed and performed in China. Therefore, no foreign-related factor was involved. The statutes did not allow the parties to appoint a foreign arbitration institution for dispute resolution, and the arbitration clause was invalid because of the conflict with the compulsory statutes.

In contrast, a similar case was heard by the Shanghai First Intermediate People’s Court in 2015. In that case, the Shanghai court held that the case involved foreign-related factors, and that even though the foreign-invested company was a domestic legal person, it had a close relationship with foreign investors. The company was located in the Shanghai Pilot Free Trade Zone, which was established to encourage international trade, and therefore the foreign-related factors could not be ignored.

The authors believe China is becoming more open and friendly towards international arbitration. Due to current economic development and policy circumstances, China’s arbitration arena will become a main battleground for international arbitration institutions, and Chinese parties will constitute a larger share of international arbitration in the future.

ANNE YUAN is a partner and director with the International Department of Boss & Young in Shanghai and YUAN SHEN is an associate with the same department

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