Doing arbitration in mainland China: what you need to know - CWG

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Lyndon Lin
Allbright Law Offices, Shanghai

China’s development has presented tremendous opportunities to foreign investors in recent decades. The Belt and Road Initiative attracts entrepreneurs from around the world to participate in making commercial deals and cross-border transactions with Chinese partners. The Chinese government has been constantly improving its business environment and creating better conditions for foreign investment. Along with this trend, an increasing number of foreign entrepreneurs are choosing to have disputes with Chinese partners resolved by arbitral institutions seated in mainland China. This article outlines several practical tips a foreign party needs to know when participating in arbitration in mainland China.

The arbitration timeframe

In mainland China, the arbitration timeframe for proceeding is determined by the rules agreed by the parties concerned. Normally, an arbitration proceeding commences by case filing and formalities examination, through the constitution of an arbitration tribunal to filings of statement of defence or counterclaim, and the arbitration tribunal holding several hearings before handing down the final award.

Most mainland China seated arbitral institutions (eg,China International Economic and Trade Arbitration Commission (CIETAC), Shanghai International Arbitration Center (SHIAC), Beijing Arbitration Commission (BAC), Shenzhen Arbitration Commission (SCIA)) set out their respective arbitration rules the General Procedure and the Summary Procedure, on the basis of the monetary amount in dispute. The General Procedure differs with the Summary Procedure in allocating a time period to each step in the arbitral proceeding. For instance, under General Procedure the award shall be rendered within six months from the formation of arbitration tribunal, whereas it’s three months for the Summary Procedure.^[1]

Based on our experience in handling multiple arbitration cases, it takes over a year for a tribunal to conclude its arbitration proceeding. It is important to note that a time limit is subject to potential extensions by the arbitral tribunal, which are not uncommon and could significantly prolong the length of the process.

Enforcement options

Merely obtaining an arbitral award in its favour is not enough for a foreign party. Sometimes the foreign party as claimant has to apply to enforce the arbitral award. For People's Republic of China (PRC)-seated arbitration, there are typically two award enforcement options.

In mainland China, the creditor of an arbitral award is entitled to apply to the People’s Court for enforcement if the opposing party fails to perform the arbitral award. Pursuant to the relevant provisions of the Civil Procedure Law,^[2] the relevant court is the intermediate people’s court at the place of domicile of the respondent or at the place where the respondent’s property is located. Meanwhile, a basic level people’s court might be designated to have jurisdiction under certain conditions.^[3]

The other advisable option for a foreign party is to seek enforcement in jurisdiction outside mainland China where the respondent’s property is located. As China is a contracting state of the New York Convention on Recognition and Enforcement of Arbitral Awards ('New York Convention'), the arbitral awards made by PRC seated arbitral institutions might be recognised and enforced by another contracting state of New York Convention. This method applies when the jurisdiction where the enforceable property located is subject to the New York Convention.

Furthermore, mainland China has entered into several bilateral arrangements relating to the recognition and enforcement of arbitral awards between mainland China and Hong Kong, and between mainland China and Macau.^[4] A foreign party could also move to the relevant court for enforcement in accordance with such arrangements.

Ways of maximising recovery

Practically, the ultimate goal of claimant in an arbitration case is to maximise the recovery of loss and damage. Most jurisdictions provide interim measures for avoidance of dissipating risk of respondent’s assets and impairment of respondent’s performing capability.

In mainland China, the interim measures frequently employed are ‘property preservation’ and ‘conduct preservation’. Property preservation is to prevent the respondent’s assets from undue impairment. Conduct preservation is to request the respondent to take or refrain from taking certain action. Both aims at avoiding improper dissipation of the respondent’s assets and impairment of their ability to perform the arbitration award to be rendered.

However, in mainland China, the arbitration tribunal is not allowed to issue a decision for an interim measure order. Nor does the arbitral institution have the right to enforce such an order. According to the Civil Procedure Law and Arbitration Law of PRC, application for preservation measures shall be submitted to the competent court through the arbitration commission chosen by the parties concerned to the arbitration. As codified in article 272 of Civil Procedure Law, the relevant court is the intermediate people’s court at the place of domicile of the respondent or at the place where the respondent’s property is located. The court will review and decide whether to grant an order for preservation measures.

In practice, the foreign party as claimant in an arbitration case shall apply to the arbitral institution and then its application will be passed on to the relevant court. For a foreign applicant, documents of identity and price on application (POA) shall be duly notarised and legalised. It is advisable that the application is submitted concurrently with or after initiating the arbitration.

Note that for property preservation, the court may order the applicant to provide security and collect preservation fees. Alternative ways for providing security include but not limited to submitting a letter of guaranty, property preservation liability insurance and using the applicant’s own money or asset as security.^[5] The preservation fees shall be calculated on the grounds of the value of the property to be preserved and shall not exceed RMB5,000 (approximately US$700).^[6]

Cultural difference and clash

Cultural difference is another matter of importance that a foreign party needs to understand when doing arbitration in China. Chinese legal culture has a tradition of judge-centre system, while Western legal culture focuses on adversary system. Sometimes legal and cultural differences in arbitration between Chinese and foreign parties may clash.

Most arbitration institutions in mainland China are quasi-governmental. Arbitration practice in mainland China is still deeply influenced by Chinese civil litigation practice. For instance in certain cases, Chinese arbitrators might take the social and political effect into account when making decisions on final awards. They are also likely to exercise ambiguous flexibility when handling such procedural issues as time limit in arbitration proceedings.

On the other hand, Chinese arbitration institutions have been evolving and bridging themselves with international common practice. To be culturally neutral, some arbitral institutions (eg, CIETAC, SHIAC, BAC, SCIA) offer panel lists of arbitrators consisting of both Chinese and Westerners, in an effort to increase diversity and impartiality.

Another new development is that overseas arbitration institutions are allowed to establish offices and administer foreign-related arbitration cases in Lin-Gang Special Area of China (Shanghai).^[7] This might be good news for foreign parties who choose to do arbitration in China. In the future, foreign parties may direct their dispute to such branches of overseas arbitration institutions for resolution, which might ease the cultural differences and possible clashes.