Domestic institutions applying UNCITRAL rules in China

The Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL Arbitration Rules) were officially adopted by the UN’s General Assembly in 1976, and have since gained widespread acceptance by the international arbitration community and serve as the standard arbitration rules in a significant number of international commercial contracts.

The UNCITRAL Arbitration Rules were originally designed as ad hoc arbitration rules, but subsequently went through three revisions, with the most recent version incorporating institutional arbitration. Despite the widened scope of application, the UNCITRAL Arbitration Rules still retain certain characteristics of ad hoc arbitration.

Further, and in accordance with UNCITRAL’s official interpretation, the function of an arbitration institution under the UNCITRAL Arbitration Rules includes being an appointing authority or a provider of administrative support to the procedures.

In Chinese arbitration practice, we have seen clauses in which the parties agree to submit their disputes to a Chinese arbitration institution, and be conducted under the UNCITRAL Arbitration Rules. Since the UNCITRAL Arbitration Rules were not originally designed to be institutional rules, there have been questions over the applicability of the rules by a Chinese arbitration institution.

For Chinese commercial entities, the validity of a hybrid clause combining a Chinese Arbitration Institution with UNCITRAL Arbitration Rules is more than a moot question, and the answer to that question hinges upon a comprehensive understanding of the issues at hand, particularly the exact function one would expect from a Chinese arbitration institution when applying the UNCITRAL Arbitration Rules.

Two approaches

With China’s current arbitration practice, a hybrid arbitration clause that simultaneously includes a Chinese arbitration institution and the UNCITRAL Arbitration Rules may be comprehended and enforced through the following two approaches.

The first is the institutional arbitration approach. This is where the Chinese arbitration institution assumes the case management function regularly seen in a Chinese arbitration institution, while the UNCITRAL Arbitration Rules are applied to the procedures.

There has been a case, handled by the Shanghai Internation Arbitration Centre (SHIAC), in which a wholly owned subsidiary established by its US parent company in China entered into a construction contract with a Chinese contractor.

The construction contract included an arbitration clause specifying that “… arbitration shall be conducted by three arbitrators under the UNCITRAL Arbitration Rules … the China International Economic and Trade Arbitration Commission Shanghai Commission [previously SHIAC] shall administer the arbitration and act as the appointing authority for arbitrators when required by the UNCITRAL Arbitration Rules”. Upon the acceptance of the arbitration case, the respondent applied to the Shanghai Second Intermediate People’s Court to challenge the validity of the arbitration clause.

After the hearing, the Shanghai court determined that, although the disputed arbitration clause reflected certain characteristics of an ad hoc arbitration, the wording of “administer the arbitration” and “appointing authority” in the arbitration clause indicated that the parties had conferred functions beyond those typically seen from an institution in an ad hoc proceeding through the SHIAC.

Specifically, the SHIAC was tasked with providing administrative services and, consequently, the Shanghai court dismissed the respondent’s application to invalidate the arbitration clause. Notably, in December 2021, the Supreme People’s Court (SPC) issued the Minutes of the National Symposium on Foreign-related Commercial and Maritime Trial Work of Courts, in which article 96 explicitly stipulated that, if the parties agree in the arbitration clause that the arbitration institutions in mainland China shall apply the UNCITRAL Arbitration Rules, the people’s courts shall not uphold claims of the invalidity on the ground that the disputed clause is an ad hoc arbitration clause.

The second approach is the ad hoc arbitration approach, where a Chinese arbitration institution merely undertakes to support the ad hoc proceeding using the UNCITRAL Arbitration Rules. Notably, the current Arbitration Law (1995) does not explicitly allow ad hoc arbitration.

However, the judicial opinions of the SPC, the draft revision of the Arbitration Law, and the Regulation of the Shanghai Municipality on Promoting the Initiative for an International Commercial Arbitration Centre have all signalled the possibility of conducting ad hoc arbitration in mainland China.

Also, the legislation does not expressly ban Chinese arbitration institutions from offering supportive services to ad hoc arbitration proceedings conducted outside mainland China. To this end, the SHIAC has issued the Guidance for Services for Ad Hoc Arbitration. As per the arbitration clause of the parties or the request from the arbitral tribunal, supportive services in this guidance may be offered to ad hoc proceedings conducted under the UNCITRAL Arbitration Rules or other sets of ad hoc rules.

Comparison

In the first approach, the arbitration institution assumes the administrative function, resembling institutional arbitration. As to the application of arbitration rules, the first approach adopts a duality of rules, where the UNCITRAL Arbitration Rules are the primary source and the institution’s own rules function as the backup. With the institutional rules still in place, though only as backup, the arbitration institution may still retain its arbitration administration role.

Taking the above case as an example, the UNCITRAL Arbitration Rules are applied per se; where there is any vacuum, the institutional rules will be the backup. Under this approach, the SHIAC exercises three key functions in accordance with the UNCITRAL Arbitration Rules: the appointment of the arbitrator; the administration of the procedures; and the financial management.

Additionally, the SHIAC undertakes the function of scrutiny over draft arbitral documents, a task not explicitly covered by the UNCITRAL Arbitration Rules but required under the SHIAC Arbitration Rules.

In the second approach, the arbitration clause provides only that the arbitration institution gives support to the arbitration. Under this approach, the function and services required from the agreed arbitration institution shall be limited to those explicitly provided for in the applicable UNCITRAL Arbitration Rules and/or through the agreement of the parties.

For Chinese arbitration institutions that have developed procedural guidance for applying the UNCITRAL Arbitration Rules, their guidance may serve as the basis for rendering support in such scenario.

Suggestion

Based on the preceding discussion of the two approaches, it can be concluded that the line between institutional and ad hoc arbitration, when both involve an arbitration institution, is the type of function that institution performs as per the agreement of the parties. Previous practice points to a clear articulation inside the arbitration clause, where the wording defines the role of an institution as either “administering” or “supporting”.

However, the semantics of real-life arbitration clauses may sometimes be ambiguous and require proper interpretation. To avoid the risk of discrepancies in the interpretation of the arbitration clauses, which could potentially result in the frustration of the contractual intent and lead to procedural inefficiencies, it is advisable for the commercial parties to explicitly clarify the function to be carried out by the agreed arbitration institution, either being administering or supporting under the UNCITRAL Arbitration Rules.

As to the Chinese arbitration institutions that are interested in adopting the UNCITRAL Arbitration Rules, their efforts should be made to accurately draw the line between the institutional approach and the ad hoc approach.