Arbitration clauses and agreements are widely used by foreign companies when conducting business in China. These clauses and agreements usually state that disputes should be resolved between parties by friendly negotiation and if failing to come to an accord, the parties should refer the dispute to an arbitration centre.
Arbitration in China is governed by the “Arbitration Law of the People’s Republic of China (Revised 2017)”. The key points of note in the Arbitration Law is that the arbitration clause must be in writing, must be sole method of dispute resolution (there can be no choice between litigation and arbitration) and contain the following:
i. an indication of the intention to apply for arbitration;
ii. the subjects to be arbitrated; and
iii. A specified arbitration centre.
It is crucial that when drafting the arbitration clause that the arbitration commission is clearly stated. If the agreement fails to specify the arbitration commission or the commission is improperly named (to the extent that there could a misunderstanding between the parties) the parties to the agreement must have supplementary documents/agreements which clarify the matter, if not any arbitration decision is likely to be disputed, and taken to litigation where the Chinese courts will resolve the dispute while voiding the arbitration agreement.
Other points to specify when drafting an arbitration clause/agreement;
i. the language to be used during the arbitration,
ii. the number of arbitrators,
iii. the nationality of the presiding arbitrator.
Parties can choose the language to be used during the arbitration, however if left unspecified, the arbitration language will be Chinese. Likewise, if the parties do not specify the nationality of the presiding arbitrator, they will be nominated by the arbitration centre and will more than likely be Chinese.
For contracts with a foreign element it is possible to choose an arbitration centre outside of China, however it may prove quite difficult to persuade the Chinese party to agree to this. Furthermore, it is important to note that the arbitration should take place in the jurisdiction of one of the parties, as a challenge to the arbitral court’s jurisdiction is likely to be raised and subsequently upheld if a party disputes the choice of arbitration centre through litigation.
Within China there is no shortage of possible arbitration centres, with over 200 empowered to adjudicate cases involving foreign elements, it is important to choose the right centre for the peculiarities of the contract to be governed. The largest and most recognised centres are CIETAC, SHAIC, SCIA and BAC which cover the usual topics of dispute such as corporate law, foreign investment, M&A, IP, finance, and securities. However, if a contract is within a specific industry and disputes are likely to arise within niche aspect it maybe more prudent for the parties to choose a specialised arbitration centre such as the China Maritime Arbitration Commission, International Aviation Court of Arbitration or the Shanghai Intellectual Property Court of Arbitration for example.
Below is a brief introduction of the two most popular arbitration centres for foreign firms operating in Shanghai.
First establish in 1988, the Shanghai International Economic and Trade Arbitration Commission (SHIAC) is located in Shanghai.
The types of disputes include, but not limit to, trade, investment, transfer of technology, M&A, finance, securities, insurance, real estate, construction, logistics, intellectual property, franchising, energy, environment interest, information technology.
Parties from more than 70 countries and regions have participated in arbitration proceedings administered by SHIAC. The awards of SHIAC have been recognized and enforced in nearly 50 countries and regions. The Panel of Arbitrators of SHIAC is constituted by 965 arbitrators. All the arbitrators come from 74 countries and regions around the world. 604 arbitrators which take 62.59% are from Mainland China, while 361 which take the rest 37.41% are from Hong Kong SAR, Macau SAR, Taiwan region and foreign countries.
First established as the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade in 1956, and later renamed in in 2000 to the Court of Arbitration of the China Chamber of International Commerce. CIETAC is headquartered in Beijing, with offices in various provinces in Mainland China and also in Hong Kong.
The parties may choose the place of arbitration and specify such in their arbitration agreement. If the arbitration agreement does not specify the place of arbitration, CIETAC will decide for the parties.
Although Mandarin is the official language of CIETAC, if the parties have agreed to use a different language, their agreement to such will prevail.
Appointment of Arbitrators
Arbitration will usually consist of three arbitrators (two party appointed arbitrators and one presiding arbitrator) unless the parties state in the arbitration clause/agreement that a sole arbitrator should be appointed. Each party should appoint an arbitrator or authorise the arbitration centre to appoint arbitrators on their behalf within 15 days of receiving the Notice of Arbitration. If the parties have agreed to appoint outside arbitrators, the arbitrators appointed or nominated may serve as co-arbitrator, presiding arbitrator or sole arbitrator, subject to the confirmation of the arbitration centre.
Procedures for Arbitration
After exchanging claims and the appointment of arbitrators, the centre will pick a hearing date. It is possible for the arbitration to be undertaken on a document only review and forgoing the hearing, this only applies when approved by both parties and by the centre. In some cases, the parties may elect to conduct the proceedings on a documents-only basis and dispense with a hearing. This can be done with the agreement of both parties and the tribunal; however, this process is generally only undertaken when there is not a substantial dispute between the parties.
If a hearing is held the arbitrators will make an award after reaching a decision, if the arbitrators can not come to a unanimous decision, a simple majority will rule. Each centre will have its own rules by which time an award must be delivered; delays are common especially if an arbitrator from a different jurisdiction is chosen. Once the award is granted by the arbitrators, the centre will review and approve at which time the award becomes legally binding.
Enforcement of the Arbitration Award
Arbitration centres do not have the power to enforce awards in China, if the losing party defaults on their obligations to honour the award, the wronged party may apply to the Intermediate People’s Court at the location where the defaulting party is headquartered. If the defaulting party is a foreign entity the wronged party can apply to the competent foreign court for enforcement of the award if the other party is resident in a jurisdiction which is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.