On May 3 2017, Shanghai No.1 Intermediate People’s Court (hereinafter “the Court”) had passed Implementing Regulation on Diversified Commercial Dispute Resolution Mechanism of Shanghai No.1 Intermediate People’s Court (hereinafter “the Regulation”). The Regulation applies to commercial cases within the jurisdiction of the Court, which are suitable to be resolved through non-litigation approaches. As for civil disputes arising from construction contracts as well as commercial property sales and purchase agreements, the Regulation shall also apply as reference. (Article 3 of the Regulation)

I.  Dynamic Integration of Litigation and Mediation

Major reform in mediation mechanism includes setting up Special Mediation Organization and Special Mediator Roster, flexible application of mediation before or after a case is accepted by the Court, as well as dynamic integration of litigation and mediation.

The abovementioned mechanism is especially beneficial to parties as follows:

1. The flexible application of mediation before or within the litigation proceeding provides parties with more opportunities to expedite dispute resolution process. Meanwhile, the bridging mechanism also ensures that mediation can be transferred into litigation immediately upon parties’ request.

Based on whether the case has been accepted by the Court or not, the special mediation mechanism is divided into two types, namely, the delegated mediation (before the case has been accepted by the Court) and the entrusted mediation (after the case has been accepted). As to the delegated mediation, the principle is that the parties reach a mediation agreement by their own and it’s optional for them to request a formal accredited mediation statement from the court (Articles 11 & 21 of the Regulation). For entrusted mediation, the principle is that after the parties reach a mediation agreement during the litigation proceeding, an accredited mediation statement will be issued by the court under its scrutiny. However, when all the parties under the mediation jointly agree that the mediation agreement shall enter into force after duly signed by the parties, after securitized the agreement, the Court may respect the parties’ choice and there is no need to issue an accredited mediation statement. (Articles 12 & 23 of the Regulation). For the achievements reached during the mediation, the Court can make judicial confirmation after scrutiny. The unsolved disputes can be transferred from mediation into trial procedure immediately (Article 12 of the Regulation).

2. Better bridging mechanism between mediation and litigation, which ensures that mediation plays a more functional role in dispute resolution process: even though mediation fails, those undisputed facts agreed during mediation are still affirmed---no need to reinvent the wheel in the subsequent litigation proceedings.

The special mediation organization or the special mediator may confirm the undisputed facts agreed by the parties during the mediation in written forms. After verified by the parties, those confirmed facts can be submitted to the Court and the Court can affirm those facts and use them directly in the follow-up litigation proceedings. Exceptions are: facts which are fake or fraudulent; facts in the subjective statement which made by the parties to reconcile or settle the dispute and the parties disagree to use these facts in the subsequent litigation proceedings (Article 18 of the Regulation).

3. Use “model judgments” mechanism to solve the puzzle of class action, provide parties with precedents to help parties to make their own dispute resolution strategy, and also guarantee the uniform application of laws to the subsequent cases within the same category.

The “model judgments” mechanism: when the object of the action is within the same category and one party has more than 10 people, the Court may choose one model case as the guideline for series of cases within the same category.

4. By using of the special mediation mechanism, parties can save plenty of time and costs for litigation.

Discounted court fees may apply when parties choose to use special mediation (Articles 19 & 20 of the Regulation). After the case is submitted but before the trial, if parties withdraw the case due to entering into a settlement agreement, the court fee can be waived; if parties reach a mediation agreement, court fee can be reduced to one quarter. During the trial proceedings, if the parties withdraw the case after a settlement agreement is made, court fee can be reduced to one quarter. When a case is closed by way of an accredited settlement statement, court fee can be reduced to one half. Besides, if one party denies the achievement reached during the special mediation without justified reasons, the other party may request the Court to rule against the former to compensate the latter with the extra expenses paid for transportation, accommodation, work delay, and witnesses in the subsequent litigation proceedings.

5. Parties enjoy double assurance: disputes can be solved through mediation directly, meanwhile the Court further offers substantive scrutiny of the mediation agreement.

The special mediation mechanism sets up a precise system of judicial scrutiny to those achievements reached in mediation (Articles 21 & 22 of the Regulation). The judicial panel conducts substantive scrutiny of the mediation agreement (with respect to no violation of jus cogens; no harm to state interests, public policy, others’ legal rights; no violation of public order and good custom or party autonomy; the content of the mediation agreement shall be clear without any unconfirmed issue).

 

II. Free Trade Zone: Limited Ad Hoc Arbitration and Extraterritorial Arbitration

1. Scrutinizing the validity of the arbitration agreements used by FTZ related enterprises (extraterritorial arbitration) (Article 24 of the Regulation).

Under Chinese law, the principle is that purely domestic disputes cannot be submitted to extraterritorial arbitration. However, the Regulation makes an exception that when an extraterritorial arbitration arrangement is made between wholly foreign-owned enterprises registered in FTZ, the Court shall not render the arbitration agreement null and void merely based on the reason that the dispute does not have a foreign-related factor.

If one or both parties are foreign-invested enterprises registered in FTZ and parties submit the dispute to exterritorial arbitration, after the arbitral award is rendered, the claimant party under the arbitration nonetheless applies to the Court for refusal to recognize or enforce the award on the ground of an invalid arbitration agreement, the Court shall not support it. And if the respondent party in the arbitration does not object the validity of the arbitration agreement during the arbitration proceedings, but, after the arbitral award is rendered, claims the arbitration agreement is invalid on ground of lack of foreign-related factors and further applies for refusal to recognize or enforce the award, the Court shall not support it.

2. The scrutiny rule of ad hoc arbitration between FTZ enterprises (Article 25 of the Regulation).

In principle, Chinese law does not allow parties to use ad hoc arbitration in mainland China. However, the Regulation confirms that if enterprises registered in the FTZ agree that the arbitration shall be heard at named location within mainland China, pursuant to named arbitration rules, and presided by named arbitrators, this kind of ad hoc arbitration agreement can be confirmed by the Court (though the Court still has discretion).

3. The scrutiny rule of amicable arbitration (Article 26 of the Regulation)

The Tribunal can decide as amiable compositeur or ex aequo et bono if the parties have expressly authorized it to do so, and as long as the award does not violate jus cogens or public interest of China, the Court can recognize it.

 

III. Practice Notes and Tips

1. Recommend special mediation organization(s) in advance.

If there are some neutral, credible, and authoritative organizations or individuals within the industry, it is better to recommend such organizations or individuals to be the members of the special mediation organization, so that it would be much more convenient to appoint them in the future.

2. Flexibly utilize those favorable articles of the Regulation on mediation.

Choose mediation either before or after formal litigation proceedings based on different individual case merits. Reasonably choose mediation for the whole dispute resolution process or merely at certain stages (e.g. to confirm undisputed facts or save part of court fees. (See I.2. I.4).

3. Based on case merits and the mediation process, reasonably choose whether request the Court to issue an accredited mediation statement or not.

When considering enforcement, under Chinese law, an accredited mediation statement has stronger credibility and enforceability than that of a mediation agreement. While the former is a judicial document endorsed by court, the latter is only an agreement between the parties. Pursuant to Articles 32 and 33 of People’s Mediation Law of PRC, if one party refuses to fully fulfill its obligation under a mediation agreement, the other party can do nothing but file a lawsuit based on the mediation agreement. While the same situation happens in an accredited mediation statement context, the other party may directly request the People's Court for mandatory execution.

Therefore, when the mediation goes very well and the expectation to fulfill the mediation agreement by both parties is high, parties can merely execute the mediation agreement between themselves in order to save court fees (see I.4). In contrast, when there is reluctance during the mediation process or the case result is imperative to the parties, then it is better for the parties to apply for an accredited mediation statement from the court, thus the enforceability of the mediation agreement can be further secured.

4. Take advantage of ad hoc arbitration and study different arbitration rules from different arbitration institutions in advance.

Compared to institutional arbitration, ad hoc arbitration has more flexible forms, as well as much lower costs (no administration fees). However, as ad hoc arbitration lacks administrative management offered by arbitration institutions, when signing the arbitration agreement, it is essential for the parties to stipulate explicit terms on procedure issues or any other possible situation that may occur in the proceedings.

Based on the wording under the Regulation, parties shall use “named arbitration rules”--- before further official guidelines are given, it’s better for parties to choose existing set of rules (either institutional rules or ad hoc rules, e.g. LCIA rules, LMAA rules, etc. but except ICC rules[1]) Therefore, it is worthwhile for FTZ enterprises to analyze and compare different arbitrations rules from those leading arbitration institutions, then choose certain suitable set of rules for direct application, thus ensure  cost-effectiveness, flexibility, and efficiency of the whole ad hoc arbitration proceedings.

5. Be prudent when submitting dispute to extraterritorial arbitration.

Even though both parties are foreign-invested enterprises registered in FTZ, risks still exist when the parties submit the dispute to extraterritorial arbitration if the case merits do not involve foreign-related issues, as there is still rooms for either parties to claim invalidity of the arbitration agreement (see II.1).

6. Be prudent when authorizing amicable arbitration approach.

The standard of judicial scrutiny of amicable arbitration is the principle of ex aequo et bono, under which more morality entanglement may override law. As a result, considerable uncertainty exists as both the tribunal and the court have great discretion on the subject matter. So, currently, it is not suggested that parties use terms of amicable arbitration under normal situations.