Upping the arbitration ante in China

March 2017  |  FEATURE  | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

Already an established and popular method of resolving disputes in China, arbitration is now set to become an even more desirable solution due to the Shenzhen Court of International Arbitration (SCIA) updating its rules so that investor-state disputes can now be heard within its hallowed walls.

Following the rules which took effect on 1 December 2016, the institution will accept arbitration cases involving investment disputes between states and nationals of other states, provided they are under United Nations Commission on International Trade Law (UNCITRAL) arbitration rules. The SCIA’s revision to its rulebook makes it the first arbitration institution in mainland China to administer investor-state arbitrations.

Although early days, the long-term impact of the SCIA’s decision to expand the scope of its jurisdiction is as yet unknown. However, being that this is the first major revision made to its modus operandi since its launch in 2012, the year the China International Economic and Trade Arbitration Commission (CIETAC) split and its former sub-commissions in Shenzhen and Shanghai announced their intention to operate as independent arbitral institutions, the impact on international investment into China is of immediate interest.

The rise of ADR in China

One reason for the popularity of alternative dispute resolution (ADR) such as arbitration in this region of the world is the increase in commercial activity between China and other markets. In part, this is due to private merchants operating independently of the dominant state owned entities. “These merchants have added not only numbers but flexibility,” says Daniel Urbas, a partner at Borden Ladner Gervais LLP. “They are able to sample a greater variety of contractual arrangements with merchants from other markets. That flexibility includes a willingness to undertake ADR.” The use of the SCIA as an option provides a half-step for both parties – a commission with Chinese roots but with rules drafted to be more accessible for non-Chinese merchants.

According to Jie Zheng, a PhD researcher in the Department of Interdisciplinary Study of Law, Private Law and Business Law at Ghent University, the opening-up policy has seen China gradually become integrated into international commercial transactions. “China has established a more robust and accommodating legal system supporting domestic and international commercial arbitration,” she explains. “This can be proved by reforms both in legislation such as granting interim measures, including preservation of property and evidence in arbitration proceedings, and in institutional rules such as including investor-state disputes by the SCIA.”

Arbitration acceptance

Also helping arbitration gain a greater level of acceptance and enforceability across China is the drive toward increasing foreign investment, a focus largely led by the government’s ‘One Belt One Road’ initiative. “Since 2013, this policy has aimed to promote regional and cross-continental connectivity between China and Eurasia,” says Sabina Adascalitei, research and academic affairs coordinator at the Chartered Institute of Arbitrators (CIArb). “With China now being an active driver of both a regional and global economy, it is very likely that arbitration will continue to grow in popularity, as more state-owned and private companies invest in overseas markets.”

Adjusting and accommodating arbitration approaches

In China, arbitration is categorised as being foreign arbitral awards, foreign-related arbitral awards and domestic arbitral awards. While domestic disputes are arbitrated in the People’s Republic of China (PRC), foreign-related disputes can be dealt with either within or outside the PRC. “Disputes that involve foreign invested enterprises incorporated in China and wholly foreign-owned enterprises are considered to be domestic unless there are other foreign elements with the disputes – such as the other party is a foreign entity or the dispute arises in a foreign country – and there is a set of special procedural rules applied to enforce foreign-related arbitral awards,” explains Ms Zheng.

Furthermore, one of the validity requirements of an arbitration agreement is to have a designated arbitration institution. In the absence of one, or any supplementary agreement, an arbitration agreement is considered to be void. “Parties must adjust their existing arbitration experience with the approach brought to the hearing room by the Chinese,” suggests Mr Urbas. “Differences exist in how to present evidence and argue a case, so be prepared to do something new, something which anticipates combining your experience with that of the Chinese lawyers and parties on the other side. The Chinese are not the only ones expected to adjust their approach when undertaking international commercial arbitration.”

If we build it, will they come?

Although the SCIA’s rules revamp may result in a surge in arbitration activity in China, some practitioners do not expect to see any substantial increase in the number of investor-state arbitrations being heard. “Issuing new rules is a necessary, first step,” says Mr Urbas. “Doing so reflects a ‘we will build it and they will come’ approach. The rules have to exist before the cases can be filed.” That said, the SCIA’s newfound status as the first Chinese arbitration institution to hear investor-state disputes does demonstrate competitiveness, and an enhancement to both the opportunities available to foreign investors and the use of international commercial arbitration.

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Fraser Tennant