PRC Arbitration Law set for Liberalization

Draft revisions to the PRC Arbitration Law look to modernize the jurisdiction’s arbitration offering. In this article, Fangda Partners’ Lin Yanhua and Matthew Townsend note the key reforms in the context of recent updates to arbitration arrangements between Mainland China and the Hong Kong SAR.

INTRODUCTION

While arbitration practices and procedures in Mainland China have changed considerably in recent years, the PRC Arbitration Law itself has undergone no ‘root and branch’ reform since it was published in 1994.   In this regard, the PRC has taken a different path to a number of other Asian jurisdictions, including its own special administrative region, Hong Kong which revamped its arbitration legislation in 2011.

For international (including Hong Kong) lawyers and parties, features of the PRC Arbitration Law can seem unfamiliar, particularly as they relate to issues such as the formal requirements for arbitration agreements, limitations on arbitration conducted outside of the auspices of domestic arbitration institutions, the powers of the tribunal, and the scope of judicial intervention in the arbitral process.

Recent changes to reciprocal arrangements with Hong Kong have signalled liberalization to come. In October 2019, a new reciprocal arrangement regarding interim measures for arbitration came into force (the “Interim Relief Arrangement”) (See update here).  This provides inter alia that PRC courts will issue measures in aid of arbitrations seated in Hong Kong and administered by qualifying Hong Kong arbitral institutions.  Consequently, in the past two years, Mainland Courts have had increased working exposure to international arbitration institutions identified in the arrangement. In the authors’ experience, it is not uncommon for a Mainland court, considering an application for relief in support of a Hong Kong-seated arbitration, to require clarification directly from the institution itself.  

Separately in November 2020 the Mainland and Hong Kong SAR authorities brought into force a supplemental arrangement regarding the enforcement of arbitration awards (“Supplemental Arrangement”).[1]  There has been considerable historic debate as to whether foreign arbitration institutions, including those established in the Hong Kong SAR, may accept and administer arbitrations in the Mainland. The original arrangement’s preamble expressly anticipated enforcement in Hong Kong of awards rendered by “arbitral authorities in the Mainland” which were in turn included in a specific “list to be supplied” by the PRC authorities.  The Supplemental Arrangement removes this wording, with the apparent effect that arbitral awards made in Mainland China are now enforceable under the arrangement regardless of administering institution.

It is also worth noting that different PRC regions have issued plans to allow foreign arbitration institutions to establish in certain specified areas in the PRC Mainland, although such plans are being implemented cautiously, and to date it is understood these foreign institutions only conduct marketing services from these locally-established offices.

KEY REFORMS ENVISAGED IN THE DRAFT

On 30 July 2021, the PRC Ministry of Justice published a consultation draft PRC Arbitration Law (“Draft”).  The Draft sets out a number of reforms to the PRC’s arbitration infrastructure, including many which would be of interest to Hong Kong lawyers and parties. Some of the key proposed amendments are addressed below.  

First, the Draft opens the door to foreign arbitration institutions accepting and administering PRC-seated cases. Notably, a new Article 12 would provide expressly for the establishment of “Foreign arbitration institutions” to set up “operational institutions within the territory of the People’s Republic of China”, for “foreign-related arbitration business”. It is understood that arbitration business” would include accepting and administering cases. This amendment would therefore be a significant step given that foreign institutions, as mentioned, have officially limited their activities in the Mainland to marketing activities.

Second, the Draft permits ad hoc (or un-administered) arbitration for China-seated foreign-related arbitration. New Article 91 provides that “parties to commercial disputes with foreign-related elements may agree on arbitration by an arbitration institution or directly by an ad hoc arbitration tribunal.” New Articles 92 to 93 further provide for the conduct of such arbitrations, and treatment of ad hoc awards.

Third, the Draft reduces the scope for arbitration agreements to be rendered invalid for failure to identify an administering institution. The draft removes the stipulation in Article 16(3) of the current PRC Arbitration Law that an arbitration agreement shall identify “a designated arbitration commission”.  It also removes a corollary provision at Article 18, that absent designation, or a supplementary agreement between the parties, “the arbitration agreement shall be null and void”.  Finally, new wording at Article 35 of the draft establishes a waterfall by which, absent specification of an institution in the arbitration clause, one shall be designated by reference first to institutional arbitration rules if any are specified in the clause, second to any subsequent agreement of the parties, third, to the common habitual residence if any of the parties, and finally to the institution first seized of the dispute.

Fourth, the Draft expressly recognizes the concept that a tribunal may rule on its own jurisdiction, the so-called Kompetenz-Kompetenz principle.  New Article 28 provides expressly that if parties wish to challenge the jurisdiction of the Tribunal, they should submit the challenge to the tribunal in accordance with the relevant arbitration rules. Prior to the constitution of the Tribunal, the relevant administering institution may make a prima facie decision as to whether the arbitration should proceed.     

Fifth, the Draft empowers an arbitral tribunal to order interim relief directly, as opposed to by way of the courts. It deletes the provisions of Article 28 and Article 46 of the PRC Arbitration Law, requiring that such an application be made to the competent people's court. Under new Articles 43 to 49, should an application be made after the commencement of an arbitration, it may be made either to the relevant court or the Tribunal.

Sixth, the Draft makes express provision for emergency arbitration. New Article 49 provides that, if prior to the constitution of the tribunal, the parties need to appoint an emergency arbitrator they may apply to the arbitration institution in line with the applicable arbitration rules. This reflects provisions of e.g. the CIETAC arbitration rules which allow for emergency arbitration.

ANALYSIS

The Draft amendments would significantly liberalize PRC Arbitration Law.  For example, the Kompetenz-Kompetenz principle, if implemented in practice, would be a significant move towards further empowering the tribunal, and reducing the scope of judicial involvement in the arbitration proceedings. The benefits of this principle are the reason it is enshrined in Hong Kong law by virtue of Article 16 of the UNCITRAL Model Law on International Commercial Arbitration.

International (and Hong Kong) lawyers and parties will also take note of the reforms relating to foreign arbitration institutions, and ad hoc arbitration.  These mean in effect that parties negotiating dispute resolution provisions of Sino-Foreign commercial contracts will have a new compromise option: China-seated arbitration which is either ad hoc or conducted under the auspices of an international institution. PRC law allows for these possibilities only with respect to “foreign-related” matters, namely those for which at least one of the parties is foreign, at least one of the parties habitually resides outside of China, the subject matter of the transaction is located outside of china; or else the legal fact that leads to the establishment, change or termination of the transaction occurs outside of China.[2]  Having said that, matters with a Hong Kong, as opposed to Mainland China, element are considered to meet this test.

It is also worth noting that the reforms to an extent bring the letter of the law into line with existing arbitration practices on the ground in mainland China. These practices have themselves evolved considerably in recent years.  For example, the express reference to emergency arbitration in Article 49, reflects the fact that China-seated emergency arbitrations have taken place, and are expressly provided for in the rules of PRC arbitration institutions for some time.  Parties to PRC-seated arbitration have also long had flexibility, should they wish, to agree upon specific procedures governing their arbitration process, such as the application of the IBA Rules on Evidence in International Arbitration, to render their arbitration procedure more in line with traditional international arbitration practice. 

The Draft has now been circulated to stakeholders for comment.

 

[1] Supplemental Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong SAR (text here).

[2] See article 178 of the notice of the supreme people’s court on issuing the opinions on several issues concerning the implementation of the general principles of the civil law of the people’s republic of china (for trial implementation) promulgated by the supreme people’s court on January 25,  1988 and article 304 of the opinions of the supreme people’s court on certain issues concerning the application of the PRC civil procedure law of the people’s republic of china, promulgated by the supreme people’s court on July 14 1992.

Counsel (International Arbitration), Fangda Partners

Matthew Townsend is an arbitration lawyer based in Hong Kong.  His practice is primarily focused on international arbitration and dispute resolution, often (but not always) involving Chinese parties.

Townsend has experience of arbitration in a number of jurisdictions under a number of different arbitration rules.  His practice focuses on the energy, infrastructure, construction, technology and international trade sectors.  He has experience acting as advocate at all stages of an arbitration hearing