Contracts relating to foreign investments in Mainland China usually provide that any dispute arising between the parties should be settled by friendly negotiation, failing which the dispute should be referred to arbitration. Resolution of disputes by arbitration is also recognised in the laws of Mainland China. Foreign related arbitrations in Mainland China are mainly administered by China International Economic and Trade Arbitration Commission (CIETAC), although many other arbitration commissions may accept foreign related arbitration cases.
As the volume of international trade grows in Mainland China, arbitration is becoming more and more frequent. CIETAC handled 1256 cases in 2013 and 1060 cases in 2012. Out of the cases it handled in 2013, 375 were foreign related. It is commonly believed that CIETAC is now the world's busiest arbitration institution.
The Arbitration Agreement
According to the Arbitration Law of China, the arbitration agreement (which is usually one of the clauses in the contract) must be in writing and contain the following particulars:
- an indication of the intention to apply for arbitration;
- the matters to be arbitrated; and
- the selected arbitration commission.
When drafting the arbitration agreement, the naming of the arbitration commission is very important. If the arbitration commission is not named or not named properly (unless it is clear to which arbitration commission the parties intended to refer), the parties must reach a supplementary agreement on the proper arbitration forum, failing which the arbitration agreement is void.
For foreign economic contracts, the parties are generally free to choose whether to arbitrate their disputes in Mainland China or elsewhere. Chinese parties are now more willing to accept arbitration in foreign countries. In 1996, the State Council clarified that arbitration commissions which were initially established to handle domestic cases, can also deal with foreign related arbitration, if both parties to the dispute agree.
CIETAC has been known by several names. Established in 1956 as the Foreign Trade Arbitration Commission of the China Council for the Promotion of International Trade, and later renamed as the Foreign Economic and Trade Arbitration Commission of the China Council for Promotion of International Trade, CIETAC settled on its current moniker in 1988. Since 2000, CIETAC has also used the Court of Arbitration of the China Chamber of International Commerce as its name.
At present, the headquarters of CIETAC are located in Beijing, with offices in various provinces in Mainland China and Hong Kong.
The parties may choose the place of arbitration and specify such in their arbitration agreement. If the arbitration agreement does not specify the place of arbitration, CIETAC will decide for the parties. Since 2012, the sub-commissions in Shanghai and Shenzhen have separated from CIETAC. There are now two commissions in Shanghai and two in Shenzhen, with different names. Parties should therefore ensure, when naming a Shanghai or Shenzhen commission, that they state the correct name of the one they intend to nominate.
Although Mandarin is the official language of CIETAC, if the parties have agreed to use a different language, their agreement to such will prevail. In our experience, CIETAC is perfectly capable of communicating with all parties in English. If necessary, CIETAC may also provide interpretation services.
Application for Arbitration
The procedures for arbitration are laid down in the CIETAC Arbitration Rules (the current edition effective from 1 May 2012). The parties may also agree to use other arbitration rules if they wish. In such case, CIETAC will perform the relevant administrative duties.
The process begins with an arbitration application. The arbitration application should be submitted to CIETAC with the following:-
- An arbitration application signed by the Claimant or its attorney specifying:
- the claimant's and the respondent's contact details;
- reference to the arbitration agreement involved;
- a statement of the facts of the case and the main issues in dispute;
- the claim;
- the facts and grounds on which the claim is based.
- Relevant documentary evidence in support of the claim (no exchange of lists of documents is required).
- The arbitration fee, calculated according to the CIETAC Arbitration Fee Schedule.
- A Power of Attorney, if a lawyer or representative is appointed by the Claimant.
Upon review of the above documents, CIETAC will decide whether to accept the application. If CIETAC accepts the application, a Notice of Arbitration together with the CIETAC Arbitration Rules (2012), a List of the Panel of Arbitrators and the Arbitration Fee Schedule will be sent to the claimant and respondent. The arbitration application and supporting documents submitted by the claimant will also be sent to the respondent.
Within 45 days of receiving the Notice of Arbitration, the respondent should file:-
- A written Statement of Defence, signed by the respondent or its attorney, including the following:-
- the relevant contact information of the respondent;
- the defence to the arbitration application, complete with the facts and grounds for the defence; and
- evidence supporting the defence.
- Any counterclaim(s), in writing, along with supporting documents. When filing its counterclaim, the respondent must pay an arbitration fee in advance, according to the CIETAC Arbitration Fee Schedule, within a specified time, failing which the respondent shall be deemed not to have filed any counterclaim.
- A Power of Attorney, if a lawyer or representative is appointed by the respondent.
CIETAC will submit the counterclaim(s) and supporting documents to the claimant, who has 30 days from the date of receipt to submit a Statement of Defence.
Appointment of Arbitrators
The tribunal will have three arbitrators (two party appointed arbitrators and one presiding arbitrator) unless the parties agree that only one arbitrator should be appointed. Each party should appoint an arbitrator or authorise the Chairman of CIETAC to appoint one on its behalf within 15 days of receiving the Notice of Arbitration. If the parties have agreed to appoint outside arbitrators, the arbitrators appointed or nominated may serve as co-arbitrator, presiding arbitrator or sole arbitrator, subject to the confirmation of the Chairman of CIETAC. If either party fails to do so, CIETAC will appoint the arbitrator for it. The parties should then jointly nominate or ask the Chairman of CIETAC to nominate the third arbitrator within 15 days from the receipt of the Notice of Arbitration by the respondent.
The Panel of Arbitrators of CIETAC consists of arbitrators the Mainland China, Hong Kong (including our partners), Macau, Taiwan and various other countries, with expertise in various areas.
Procedures for Arbitration
After exchanging pleadings and appointing arbitrators, CIETAC will fix a hearing date. In some cases, the parties may elect to conduct the proceedings on a documents-only basis and dispense with a hearing. This can be done with the agreement of both parties and the tribunal. Documents-only arbitration is suitable for cases where there is no substantial factual dispute.
The three arbitrators will make an award after the hearing. If the arbitrators cannot reach a unanimous decision, it will be decided by simple majority. The Arbitration Rules provide that the tribunal shall render an award within six months after the tribunal is formed, although this time limit can be extended by CIETAC. Delays are not unusual, given that the three arbitrators involved may reside in different jurisdictions, and the award must be reviewed and approved by CIETAC before it is issued. The award comes into legal effect on the date on which it is made. If no time limit is specified in the award, the parties should comply with it immediately. Otherwise, they must comply with the award within the time limit specified.
The tribunal has the power to decide in the award the arbitration fees and expenses to be paid by the parties to CIETAC, as well as any compensation for expenses including legal costs to be paid to the winning party.
If any matter which should have been decided by the tribunal was omitted from the award, either party has 30 days from receipt of the award to request in writing an additional award. If the tribunal finds that there is such omission, it has 30 days from receipt of the request to make an additional award. Similarly, the tribunal can on its own initiative make an additional award within a "reasonable period of time" following the arbitral award.
At any time before the final award is made, a partial award may be made on any issue, provided that it is considered necessary by the tribunal or the parties request such and the tribunal considers it necessary. Failure to perform the partial award will not affect the continuation of proceedings nor prevent the tribunal from making a final award.
The Arbitration Rules also provide for a summary procedure to be followed where the amount in dispute is below RMB 2,000,000 or where the parties agree to use the summary procedure. Upon accepting the application for the summary procedure, CIETAC will issue a Notice of Arbitration. Only one arbitrator, who should be appointed by the parties by agreement within 15 days after receipt of the Notice of Arbitration, will preside over the summary procedure. Failing such agreement, the Chairman of CIETAC will appoint an arbitrator for the parties. Either an arbitration with a hearing or a documents-only arbitration may be adopted, as CIETAC deems fit.
The time limits for filing of documents and publication of the award under the summary procedures are shorter than those under normal procedures. The respondent has to file the defence and counterclaim within 20 days after receipt of the Notice of Arbitration and the award must be given within 3 months from the date the tribunal was formed.
Enforcement of the Arbitration Award
CIETAC has no power to enforce awards. If one party fails to comply with the award, the other party may apply to the Intermediate People's Court, in the place where the respondent has its residence or where its property is situated, for enforcement of the award, pursuant to Chinese law. Alternatively, a successful party can apply to the competent foreign court for enforcement of a CIETAC award, pursuant to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, in the country where the foreign party is situated.
According to a circular (issued by The People's Court in 1995) concerning the handling of issues regarding foreign-related arbitration and foreign arbitration matters, if an Intermediate People's Court intends to turn down an application for enforcing an award (with a foreign element) of a Mainland China arbitration commission or a foreign arbitration award, it must refer the application to the Higher Court for review before making the decision. If the Higher Court is of the same view as the Intermediate People's Court, it must further refer the application to the Supreme Court in Beijing and no decision can be made until the view of the Supreme Court is sought. This practice assists to alleviate the concern of some foreign parties that awards may not be enforced in Mainland China due to local protectionism, especially if the losing party is a state-owned enterprise.
Enforcement in Hong Kong
Before the resumption of sovereignty of Hong Kong to Mainland China, enforcement of Chinese arbitration awards was carried out under the New York Convention, as both Hong Kong (through the United Kingdom) and Mainland China were member states to the New York Convention. After 1997, the New York Convention is no longer applicable, as Hong Kong became a special administrative region of Mainland China.
In order to facilitate the reciprocal enforcement of arbitral awards in Hong Kong and Mainland China after 1997, an agreement was signed on the reciprocal enforcement of arbitral awards between Hong Kong and Mainland China on 21 June 1999 (the Agreement). Under the Agreement, the procedures for enforcement of a Mainland award are now embodied in sections 92 to 98 of the Arbitration Ordinance (Cap.609). The following are the major features of the Agreement for enforcement of Mainland awards in Hong Kong:-
- Applications for enforcement of the award should be made to the Hong Kong High Court.
- The applicant cannot file the application in both Mainland China and Hong Kong at the same time..
- If the applicant has applied for enforcement in Mainland China, only when the result of the enforcement in Mainland China is insufficient to satisfy the award may the applicant apply to the Hong Kong High Court for enforcement.
- The time limit for the application shall be governed by the law on limitation periods in Hong Kong i.e. six years from the date when the other party fails to fulfil its obligations under the award.
- The grounds for refusing to enforce the award are similar to those under the New York Convention.
Awards given by recognised arbitration commissions in Mainland China (there were 148 commissions as at 18 May 2011) may be summarily enforced in Hong Kong. When choosing an arbitration commission, the parties should ensure that it is one of the recognised arbitration commissions, if the arbitral award is one that may have to be enforced in Hong Kong.
In our experience, applications for enforcement of Mainland China awards are simple and will normally be approved by the Hong Kong High Court very quickly.
Costs and Expenses
The arbitration fee for foreign-related or international arbitrations or a counterclaims is calculated according to the following schedule (as of 1 May 2012):
Click here to view table.
In addition to this fee, RMB10,000 will also be charged as a registration fee in each case to cover the expenses for examining the application for arbitration, accepting the case, computerized data management and filing documents.
For domestic arbitrations handled by CIETAC, the following fees are payable:-
- Registration Fee
Click here to view table.
- Case Handling Fee
Click here to view table.
For both foreign related and domestic cases, where the amount of the claim is not ascertained at the time when the application for arbitration is submitted, the amount of the arbitration fee shall be determined by CIETAC. Apart from the arbitration fee and the standard registration fee detailed above, CIETAC may collect other extra, reasonable and actual expenses, such as the arbitrator's special remuneration, travel, accommodation and expenses. In our experience, foreign arbitrators may sometimes charge fees in addition to the scale fees. CIETAC will notify the claimant of the exact amount payable at the appropriate time.
The arbitration fees charged by CIETAC include the arbitrator's fees, and CIETAC arbitrators therefore do not charge the parties separately on an hourly basis.
Again, like Hong Kong arbitrations, parties to CIETAC arbitrations usually instruct lawyers, although this is not mandatory. There is also no requirement to retain Chinese lawyers for CIETAC arbitration proceedings. We conduct cases for clients from Hong Kong and, if the situation requires, with the assistance of our offices in Mainland China or other Mainland China law firms, when the case involves issues of PRC law.
As with Hong Kong arbitrations, we also charge on an hourly basis for CIETAC arbitrations. CIETAC arbitrations may be cheaper than arbitrations in Hong Kong since exchange of documents and exchange of witness statements is usually not required. Hearings also tend to be shorter.
Claimants should note that according to the Arbitration Rules, the tribunal can award the expenses including legal fees reasonably incurred by the winning party.
Common CIETAC Arbitration Clauses
The following model arbitration clause has been recommended by CIETAC:
"Any dispute arising from or in connection with this Contract shall be submitted to China International Economic and Trade Arbitration Commission for arbitration which shall be conducted in accordance with the Commission's arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties."
Parties may put a more elaborate arbitration clause in their contract to cater for their individual needs. For example, a foreign party may provide for a non-Chinese person to act as the presiding arbitrator. Legal advice should be sought for drafting a tailor-made arbitration agreement to ensure that it is operative and enforceable.