September 25, 2019

Journey to the East: Chinese arbitration policy and the challenge for institutions

In the six years since Xi Jinping announced the Belt and Road Initiative (BRI), western arbitral institutions have gone to some lengths to pick up disputes work resulting from the huge infrastructure projects it entails.

The ICC in particular has set up a Belt and Road Commission, and now publishes a version of its rules in Chinese. To some extent the Chinese authorities have facilitated this process, although the overall picture is mixed and more could be done.

Off-shoring arbitration

To start with, a bilateral arrangement was announced in April 2019 to the effect that courts in Mainland China will recognise and enforce interim measures issued in arbitrations in Hong Kong. The key point here is that the arbitration in question does not have to be administered by a Hong Kong institution; it is enough that it is seated in Hong Kong. So, in theory, ICC-administered arbitrations could benefit from the arrangement. However, this will be possible only if the ICC is included in the Chinese authorities’ list of qualifying institutions, which is not a foregone conclusion. Indeed it is not clear when the list will be published, although that should happen relatively soon.

This change may seem a modest one, but in fact it marks a significant shift in judicial policy in mainland China, where the courts have traditionally supported arbitrations seated within the jurisdiction, but not those seated elsewhere. Now the possibility of “off-shoring” arbitration has opened up, without losing the benefits of Chinese judicial support.

A free trade zone

A further development, announced in August 2019, is Beijing's decision to allow certain foreign arbitral institutions to administer arbitrations seated in mainland China, provided they are based in the new free trade zone being created in Shanghai. In article 4 of the relevant General Planning document (General Planning of the New Area of the China (Shanghai) Pilot Free Trade Zone Program), it is explicitly stated that state support will be in the form of interim measures such as asset and evidence preservation. Again, it is not clear yet whether which institutions will be allowed to take advantage of this arrangement, but the ICC, SIAC and HKIAC all have representative offices in the zone and would expect to be covered. These and other details of how the arrangement will work in practice will no doubt be published in due course.

This toehold in mainland China is if anything more significant for western arbitral institutions than the bilateral arrangement with Hong Kong, and opens up many possibilities for them. However, it has to be seen in the context of other factors that make the competition for BRI work more challenging.

The competition for BRI work

Competition for this work comes in many forms. First and foremost, China's own arbitral institutions are more internationally focused than they used to be. The Beijing Arbitration Commission (BAC), for example, has recently updated its arbitration rules and fee schedule with effect from 1 September 2019. This brings BAC's fee structure much closer to western practice. Chinese arbitral institutions are also more numerous than they were: in 2012, CIETAC spawned the Shanghai International Arbitration Centre (SHIAC) (also known as the Shanghai International Economic and Trade Arbitration Commission) as well as the Shenzhen Court of International Arbitration (SCIA).

In addition, Chinese institutions have been forging alliances with their counterparts in nearby BRI countries. On 13 August, for example, the China International Economic and Trade Arbitration Commission (CIETAC) signed a memorandum of understanding with the Asian International Arbitration Centre, based in Malaysia, with the specific purpose of supporting BRI projects there. This follows similar MOUs signed by CIETAC, SCIA and the Xi'an Arbitration Commission on the one hand, and the Singapore International Arbitration Centre on the other, in the second half of 2018. These will facilitate, among other things, the consolidation of arbitral proceedings that are subject to different institutions' rules, greatly increasing the attractiveness of arbitration generally in the region.

The broader picture

More broadly, arbitration itself is facing increased competition in Asia-Pacific countries.

Both China and Singapore have set up international commercial courts which will attract many parties who have misgivings about arbitration. The new courts are actually quite different in character – for instance, there is no right to appeal from decisions of the Chinese International Commercial Courts – but both stand to benefit from the Hague Convention on Choice of Court Agreements 2005, which allows court judgments to be enforced across borders, just as international arbitral awards can be enforced throughout the world under the New York Convention. In fact, the Hague Convention has been signed by China, but not yet ratified by it, whereas it is already in force for Singapore. However, it should come into force for China relatively soon.

Another challenge to arbitration in general comes in the form of mediation, supported now by the Singapore Mediation Convention, which was concluded on 7 August. Of course, mediation is not a simple alternative to arbitration or litigation, but it does compete with them in the sense of offering a more consensual and arguably more commercially sensitive approach to the resolution of disputes. Like all forms of alternative dispute resolution (ADR), mediation can be built into commercial agreements, and although parties cannot be forced to engage meaningfully in the process, the fact that they are contractually obliged to attempt mediation makes it much more likely that they will do so – and at a stage when not too much time and money have been invested in formal legal proceedings.

Unlike the Hague and New York Conventions, the Singapore Convention is not yet in force for any country: at least three states have to sign and ratify (or take equivalent steps) before it will have legal force, and then only after six months have passed. However, in a region of the world where mediation in different forms has deep cultural roots, it is already helping to promote the procedure in the international commercial context.

The challenge for Western institutions

It is a mistake to think of BRI purely in terms of infrastructure projects; it also encompasses trade agreements, cultural exchanges and much else besides. However, infrastructure is at the heart of the initiative, and therefore arbitration will inevitably play a central role in it, whatever room there is for other forms of dispute resolution. The extent to which Western arbitral institutions can profit from the proliferation of BRI projects is an open question, however. It may not be necessary, strictly speaking, for them to have direct access to mainland China or to a jurisdiction like Hong Kong which has a special arrangement with courts there, but that would certainly help. In any case, Western institutions need to demonstrate that their experience and expertise makes them more appropriate managers of dispute resolution on BRI projects than national and international courts in the region, and also better than other arbitral institutions such as SIAC that are closer to home.

This piece first appeared in Global Arbitration Review