The Chinese lawmaker, being the Ministry of Justice of the PRC, recently published a draft revised New Chinese Arbitration Law for public consultation, which suggests a series of major changes. While most of the changes are in line with the international practice, there are also significant deviations from the commonly accepted practice suggested by the UNCITRAL Model Law. This series aims to highlight the changes and briefly evaluate its impact on foreign parties in dealings with Chinese parties, who may face potential arbitration proceedings in China. This is part one of a two-part series.
The Chinese Arbitration Law (1994) (CAL) was drafted and enacted more than 20 years ago and has been criticised for its out-of-date regime governing the practice of arbitration in China. After years of debates and discussions, the amendment of the CAL was finally prioritised by the Standing Committee of the National People’s Congress and the State Council. On 30 July 2021, the Chinese Ministry of Justice circulated the draft of an Amended Chinese Arbitration Law for public consultation (‘the Draft’), which marks a significant step towards its formal amendment. On the one hand, a number of important features of contemporary international arbitration practice are now accepted by the Draft, demonstrating its aim to be in line with the international practice. On the other hand, some distinctive Chinese features in the Chinese arbitration system are maintained and developed, furthering its divergence from international expectations. Both of these aspects would have significant impacts on foreign parties who might consider, or who might be subject to, China-related arbitration. The authors will highlight some important features and briefly discuss their impacts on foreign parties conducting arbitration in China in this two-part series.
I. Modified test for the validity of arbitration agreements
The current CAL adopts a very rigid approach to the validity of an arbitration agreement, which requires the designation of an ‘arbitration commission’ (articles 16 and 18). This approach totally excludes the possibility of ad hoc arbitration under Chinese law, and leads to doubts about whether foreign arbitration institutions could be considered as a valid designation. This rigid approach was once criticised as a ‘Great Wall’ that bars foreign practitioners and foreign institutions from entering into the Chinese market. The Draft now abandons the test based on the designation of arbitration commissions in determining the validity of arbitration agreements and only requires the parties’ consent to arbitrate (article 21), which is in line with international practice (see article 7 of the UNCITRAL Model Law). It means that parties now have more flexibility in drafting their arbitration agreements.
For foreign party-related arbitration, the Draft also confirms the applicable law in the determination of the validity of arbitration agreements: first, the law chosen by the parties; second, in the absence of the express choice of law applicable to the arbitration agreement, the law of the seat of arbitration; and finally, if there is no agreement on the applicable law, nor the seat of arbitration, the court may apply Chinese law in the determination of the validity issue. This choice of law provision removes the concept of ‘the law of the place where the arbitration institution is located’ (article 18, The Law of the Applicable Laws in Dealing with Foreign-related Civil Relationships) in the second step of the previous test provided by the Law of the Applicable Laws in Dealing with Foreign-Related Civil Relationships and its associated judicial interpretation (article 14, The Supreme People’s Court, Judicial Interpretation of the Law of the Applicable Laws in Dealing with Foreign-related Civil Relationships).
II. the Competence-competence principle
Further, article 28 of the Draft provides that the power to determine the jurisdiction of the tribunal, including the validity of the arbitration agreement, is now with the arbitral tribunal. It further provides that the arbitration institution may determine on a prima facie basis whether the arbitration proceedings might continue when facing a ‘lack of jurisdiction’ challenge; and that court cannot determine the jurisdictional issue without the case being dealt with through the above procedure. This is a full adoption of the competence-competence principle and totally overturns the position in the current CAL in which the jurisdiction is either determined by the arbitration institution or the court, but not the arbitral tribunal (article 20). The rigid timeframe for raising such a jurisdictional challenge is also relaxed; while the CAL provides that the challenge must be raised before the first hearing, the Draft allows the tribunal to determine the timeframe for such a challenge to be made. For foreign parties, this approach better fits common understandings and expectations that the arbitration will operate autonomously.
III. The concept of the seat of arbitration
An equally important feature is the emphasis on the concept of the ‘seat of arbitration’ and its legal effect in the Draft. As introduced above, the regulatory regime on arbitration proceedings in the CAL relied on the arbitration institutions. Thus, the concept of ‘seat of arbitration’ was not expressly mentioned in the CAL. Article 27 of the Draft now formally recognises the seat of arbitration as a legal concept that determines the place where the arbitral award is made and which court supervises the relevant issues, such as the review on jurisdictional matters, or the annulment of arbitral awards. This approach no longer relies on the location of the arbitration institution and fully respects the parties’ choice of the seat of arbitration and its legal consequences, which is in line with international practice.
IV. More flexibility in arranging the arbitration proceedings
In relation to the removal of the requirement of designating an arbitration institution in the arbitration agreement, ad hoc arbitration is now allowed under the Draft in foreign-related commercial arbitration cases (article 91 of the Draft). The parties may designate an arbitration institution to assist with the issues relating to the establishment of the arbitral tribunal, or, in the absence of an arbitration institution consented to by the parties, request a designated arbitration institution from the court of the seat, the place where the party is located, or the place having the closest connection with the dispute (article 92 of the Draft). This can be seen as one of the most significant achievements of the Draft. The traditional view was that the CAL do not recognise the status of ad hoc arbitration conducted in China. While in the last few years, some ‘pilot projects’ allowing ad hoc arbitration were operated in some special economic zones, it was never recognised at the legislative level. The Draft now not only paves the way to, but also confirms, the legality of ad hoc arbitration in China for foreign parties.
Alongside this change, flexibility is also provided to the parties in shaping their arbitration proceedings, such as in selecting arbitrators. Article 50 of the Draft now allows the parties to select arbitrators beyond the arbitrators’ list provided by the institutions and allows the parties to set requirements on arbitrators, which was not expressly confirmed in the CAL. Article 51 also changes the default rule for the appointment of arbitrators in the CAL. For example, under the CAL, when the parties failed to jointly agree on the Presiding arbitrator, it should be appointed by the Chairman of the arbitration institution; while under the Draft, the role should first be filled jointly by the other two arbitrators, and the arbitration institution would only play a residual role in the absence of such a choice. This change demonstrates the increasing autonomy of arbitration proceedings in China.
This analysis is to be continued in Part II.
Dr Shu Zhang is a Lecturer in Law at Deakin Law School, Deakin University. Dr Peng Guo is a Lecturer in Law at the Graduate School of Business and Law, RMIT.
Suggested citation: Shu Zhang and Peng Guo, ‘The Proposed Reform of the Chinese Arbitration Law and its Impacts on Foreign Parties: Part I’ on ILA Reporter (14 October 2021) <https://ilareporter.org.au/2021/10/the-proposed-reform-of-the-chinese-arbitration-law-and-its-impacts-on-foreign-parties-part-i-shu-zhang-and-peng-guo/>