The Proposed Reform of the Chinese Arbitration Law and its Impacts on Foreign Parties: Part II

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 two of a two-part series.

In part one, we addressed how the draft of the amended Chinese Arbitration Law (‘the Draft’) modifies the test for the validity of arbitration agreements, adopts the competence-competence principle, expressly recognises the legal concept of the ‘seat of arbitration’, and creates more flexibility in the arrangement of arbitration proceedings. In part two, we consider the provisions for interim measures and emergency arbitrators, med-arb practice, and judicial review mechanisms that are available under the Draft. 

V. Interim Measures and Emergency Arbitrators 

Current Chinese arbitration practice is that interim measures only include the preservation of property and evidence, which is an order that must be issued with the assistance of supervisory courts. Articles 43-49 of the Draft expands the types of interim measures to ‘act preservations’ (which is similar to the concept of injunctions in common law systems) and other necessary interim measures, and confirms that both arbitral tribunals and courts may deal with the relevant applications. In particular, tribunal-made interim measures can be enforced by relevant courts. Article 49 further confirms that emergency arbitrators can be used for the issuance of interim measures before the establishment of the arbitral tribunal. The addition of these provisions provides additional protection for parties involved in arbitration proceedings based in China.  

VI. Mediation and Arbitration 

The practice of med-arb, or mediation by arbitrators, has long been seen as one of the distinctive features of the Chinese arbitration practice. This is reflected in article 51 of the CAL. It is notable, however, that this approach is quite controversial due to the ‘double hats’ worn by the arbitrators and the potential ex parte communications made in the process (see Gao Haiyan v Keeneye CACV 79/2011). The Draft now allows the parties to choose external mediators or mediation institutions during the arbitration proceeding as an alternative, which properly addresses the ‘double hats’ concern. In addition, the Draft further confirms current Chinese practice that the settlement agreement between the parties, whether resulting from mediation or not, could be confirmed by the arbitral tribunal in the format of a ‘Mediation Document’ or an arbitral award, which are equally enforceable (articles 69-71). This is an innovative feature of Chinese arbitration which foreign parties might pay attention to and utilise in practice.   

VII. Judicial Review Mechanism 

The current CAL adopted a ‘dual track’ mechanism in the judicial review of arbitral awards. While domestic arbitration law imposes stricter requirements on arbitral awards and allows limited substantive review on the merits (for example, allowing a review on forged evidence), judicial review on foreign-related arbitral awards is subject to a more lenient review scheme similar to the Model Law and the New York Convention.  

The Draft, however, now merges these two mechanisms and extends the more conservative approach to foreign-related awards. Under article 77 of the Draft, an arbitral award might be set aside if: 

(1) there is no arbitration agreement, or the arbitration agreement is invalid; 

(2) the disputed matter is not covered by the arbitration agreement or not arbitrable under this law; 

(3) the respondent does not receive proper notice of the appointment of arbitrators or the arbitration proceeding, or failed to present themselves for other reasons not attributed to themselves; 

(4) the constitution of the arbitral tribunal or the arbitration proceeding violates Chinesethe laws or the agreement between the parties, which severely infringes the rights of a party; 

(5) awards resulted from fraudulent conduct such as malicious collusion or the forgery of evidence; or 

(6) arbitrators were involved in bribery or acted in their own personal interests over the law in determining the case. 

In addition, the arbitral awards shall be set aside if it is against the social public interest. 

This means that, regardless of whether a foreign party is involved, the arbitral award would be subject to limited substantive review on the merits, including possible issues of fraud. This is a significant deviation from the ‘procedural review’ approach in the New York Convention and the Model Law, which foreign parties should take into account. 

Furthermore, the Draft only maintains the above judicial review mechanism for judicial review conducted by a supervisory court for the purpose of setting aside of the award, and removes judicial review by an enforcing court (except on the ground of violating the social public interest). This means that the judicial review of arbitral awards will be predominantly conducted by the supervisory court (the court of the place of arbitration), rather than the enforcing court (where the business or property of the losing party is located in China). This is significantly different from the Model Law, which provides an identical judicial review mechanism at both the place of arbitration and at the place of enforcement (articles 34 and 36 of the Model Law). Thus, if the parties choose arbitration in China, the choice of place of arbitration is of great significance. In particular, foreign parties might take into account whether the courts at the place of arbitration (whether it be the particular city or municipality) have sufficient experience in producing consistent, high-quality decisions on arbitration-related matters. 

A final change regarding the judicial review mechanism is the newly added ‘review’ of the court’s decision on the setting aside of arbitral awards. In the past, the decision by the court to set aside an award has been final, subject to a possible internal ‘prior reporting system’ applicable to foreign-related awards or domestic awards.  The prior reporting system was an internal procedure adopted by the Chinese judicial system to review the cases in which an arbitration agreement is decided to be invalid, or an arbitral award is set aside or refused enforcement. If an Intermediate People’s Court made such a decision, they had to first report the case to the relevant High People’s Court. If the High People’s Court agreed with the decision, depending on the nature of the dispute, they could be required to report the matter further to the Supreme People’s Court for comment (see an appraisal of the Prior Reporting System here). 

The Draft now provides that the party who is unsatisfied with the setting aside of an arbitral award may request a review (not appeal) of the decision to the higher court. The key difference between the ‘prior reporting system’ and the request for review is that the former is an internal procedure initiated and managed by the courts, while the latter is a formal procedure offered to the parties, in which the relevant party can make submissions and expect a formal decision to be made. It is uncertain whether the ‘prior reporting system’ still applies when such formal remedy is provided to the parties under the Draft.  

VIII. Conclusion 

The Draft is only the first step of many for amending the Chinese Arbitration Law (CAL). This project is not a top priority in the Chinese lawmaker’s working plan and is yet to be submitted to the National People’s Congress or its Standing Committee for reading (for the 2018-2023 Working Plan of Law-Making of the Standing Committee of the National People’s Congress, see here; for the 2021 Working Plan of Law-Making of the State Council, see here). It is therefore expected that any suggested changes will not be finalised for at least a few years. It remains to be seen whether these new features will be furthered in the next step of law-making and ultimately adopted in the new CAL in the future.  

Despite this, the Draft sends a positive signal, as many features are in line with key concepts and best practice in international arbitration, such as the adoption of the competence-competence principle, the wider use of interim measures, the less rigid approach to determining the validity of arbitration agreements, as well as limited acceptance of ad hoc arbitration. These features would be welcomed by foreign parties and counsel dealing with disputes with Chinese parties. At the same time, the distinctive features of arbitration in China as reflected in the Draft, such as the use of mediation in arbitration proceedings and the removal of the enforcement of judicial review for awards made in China, may bring foreign parties and counsel some uncertainty in dispute-resolving processes with Chinese parties.  

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.