A Positive Outlook For Arbitration In China Despite COVID-19

Law360 (March 26, 2020, 2:46 PM EDT) --
Wilson Wei Huo
Wilson Wei Huo
2019 proved another busy year for arbitration lawyers in mainland China, with the highlights being the significant growth in case volume and further refinement of the arbitration infrastructure. However, 2020’s outlook of arbitration in mainland China seems less certain amid the outbreak of the novel coronavirus pneumonia.

This article will explore likely development trends in mainland China arbitration in 2020 amid the coronavirus outbreak, taking guidance from recent developments in arbitration industry in mainland China.

The General Impact of the Coronavirus on Mainland China Arbitration Industry

The mushrooming coronavirus outbreak that hit mainland China at the beginning of 2020 has been declared a pandemic by the World Health Organization. Cities were under lockdown, the Lunar New Year holidays were extended, the resumption of business is delayed, and people are required to stay home to restrict public movements. Mainland China has sacrificed a lot to contain the deadly virus while a shadow was cast over all walks of life, including arbitration.

However, there are still reasons to be optimistic. Almost all arbitration institutions in mainland China have announced special measures in response to the coronavirus outbreak, such as deferring all meetings and events, automatic adjournment of scheduled hearings, and promotion of online communication, submissions and services.[1]

These measures would effectively minimize the impact of the coronavirus and, to some extent, allow cases to proceed as usual. Practitioners believe that the influence of the coronavirus is all temporary and they look forward to a prosperous 2020.

Continued Growth in Arbitration Volume of Both Domestic and Foreign-Related Cases

Arbitration has been steadily gaining popularity in mainland China in recent years. As shown in the annual report of China International Economic and Trade Arbitration Commission, or CIETAC, one of the major arbitration institutions in mainland China, in 2019 its overall caseload increased by 12.53% to 3,333 disputes.[2] The total amount in dispute increased by 20.3% to RMB 122.04 billion ($17.46 billion).[3]

Similarly, in 2019 the Beijing Arbitration Commission/Beijing International Arbitration Center, or BAC, another major arbitration institution based in Beijing, also reported 38.18% growth in caseload to 6,732 cases, while the total dispute amount increased by 20.74% to RMB 88.2 billion ($12.55 billion).[4]

The internationalization progress of mainland China arbitration is particularly impressive. In 2019, CIETAC handled 617 foreign-related cases, accounting for 18.5% of its total caseload.[5] The total amount in dispute of the foreign-related cases grew by 30.79% to RMB 38.08 billion ($5.41 billion).[6] BAC also saw a significant increase in foreign-related cases as 163 cases submitted to BAC were of international nature with the total amount of RMB 6.95 billion ($990 million) in dispute.[7]

The overall development of the mainland China arbitration industry as demonstrated by these surging figures is very promising. It is, on the one hand, the result of the efforts by mainland China arbitration institutions to enhance quality, case management efficiency, institutional transparency and participation in the global arbitration community.

On the other hand, the implementation of interregional initiatives such as the One Belt One Road (a collection of interlinking trade deals and infrastructure projects throughout Eurasia, the Pacific and Africa), the Greater Bay Area (a development plan to create a world-class city cluster across the Guangdong-Hong Kong-Macau region) and the Pilot Free Trade Zones, or PFTZ (regional free trade zones set up to test new styles of foreign investment management, trade facilitation and transformation of government functions to better integrate the economy with international practices), also bolstered international arbitration in mainland China.

We predict this trend will continue in 2020 as the long-term momentum remains solid even under the threat of the coronavirus. In addition, the increasing enforceability of arbitral awards, the easy access to arbitration institutions, and the greater input that parties have over the arbitral process will all contribute to a growing preference for arbitration.

Besides, due to the coronavirus outbreak, numerous contracts are being delayed, breached, terminated or frustrated, and these would spark even more disputes that may end up in arbitration proceedings, providing additional momentum to the mainland China and cross-border arbitration markets.

Constant Improvement and Innovation of Arbitration Mechanisms in Mainland China

Alongside the growth in the use of arbitration by mainland China companies, authorities and arbitration institutions on the mainland are also constantly working to improve the pro-arbitration judicial environment and arbitration mechanisms, and this will provide end-users of arbitration with more confidence in mainland China arbitration’s future.

Broader Judicial Assistance and Closer Interregional Cooperation

The year 2019 witnessed further improvement of overseas enforceability of mainland China arbitral awards and expansion of the current interregional judicial assistance regime. On April 2, 2019, mainland China and the Hong Kong Special Administrative Region, or HKSAR, entered into the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the HKSAR.

As pointed out in Wilson Wei Huo’s publication "Mutual Assistance Gets Closer,"[8] the arrangement is a response to the realistic needs of mutual assistance in interim measures in aid of arbitral proceedings between the mainland and the HKSAR. Above all, the primary significance of the arrangement is that it provides the legal basis for parties in arbitral proceedings in HKSAR to apply for interim measures from the courts of the mainland. It also gives guidance to the courts of the mainland in dealing with an application in relation to interim measures assistance from parties in arbitral proceedings in the HKSAR.

The arrangement in effect brings judicial assistance between the mainland and the HKSAR even closer in the arbitration field. Meanwhile, it reflects the heightened levels of interregional arbitration cooperation within the Asia-Pacific region and the growing overseas recognition of the quality and credibility of the arbitral and judicial mechanisms in mainland China in general. As a result of the mutual judicial recognition and cooperation, the number of interregional arbitration cases between the mainland and the HKSAR will continue to surge in the future.

Further Opening Up and Introduction of Overseas Arbitration Institutions

Mainland China authorities have announced a bundle of laws and rules in support of further internationalization of arbitration. For example , the Administrative Measures for Establishing Business Offices by Overseas Arbitration Institutions in Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone, which came into force on Jan. 1 this year, allow overseas arbitration institutions to set up offices in the Lin-gang Special Area, a newly added part of the Shanghai PFTZ launched in August 2019, and administer foreign-related arbitration cases in mainland China.

In fact, as early as in 2015, the Plan of Further Deepening the Reform and Opening up of China (Shanghai) Pilot Free Trade Zone announced by the State Council, already permitted “renowned international commercial dispute resolution institutions” to set up representative offices in the PFTZs. But the administrative measures that came into effect this year for the first time make clear that overseas arbitration institutions may administer cases in mainland China through their PFTZ offices and what types of disputes they may handle.

The introduction of well-established international arbitration institutions into the market is no doubt a big step toward further opening up and internationalization. It may strengthen the foreign investors’ faith in mainland China arbitration practice and spur mainland China arbitration institutions to continuously align their services with international standards. It is also interesting to see how these international arbitration institutions will explore and adapt to the mainland China market.

Reinforcement of Institutional Innovations and Developments

Innovations and developments made by mainland China arbitration institutions in 2019 will likely be reinforced and witness market response in 2020. For example, the Shenzhen Court for International Arbitration, or SCIA, a major arbitration institution based in Shenzhen, introduced an optional “internal” appellate procedure for arbitration proceedings, the first in mainland China.

Normally, the arbitration procedure is single-instance and an arbitral award would be treated as final and binding, subject to very restricted judicial review only. However, the optional appellate procedures would allow the parties, upon agreement, to refer a matter for which an award has been rendered to the SCIA to an appellate tribunal for rehearing. This innovative mechanism would provide greater leeway for parties to seek substantive review of arbitral awards without costing the efficiency and finality of arbitral proceedings.

However, it is worth noting that the application of the optional appellate procedure is subject to limitations as it might be “prohibited by the laws of the place of arbitration.” As single-instance arbitral awards are mandatorily final under the Arbitration Law of the People’s Republic of China, such appellate arbitration is not allowed under mainland China laws.

Therefore, for those who intend to submit their cases to the SCIA’s optional appellate procedure, it is advisable to choose jurisdictions that permit “internal” appeals within arbitration proceedings, for instance, the U.S., the U.K., France, Singapore and the HKSAR.

More Reform and Innovation in Sight: Ad Hoc Arbitration

It is possible to see more reforms and innovations in 2020 with the biggest story perhaps being ad hoc arbitration.

Ad hoc arbitration is prima facie disallowed under the PRC Arbitration Law, which dictates that for an arbitration clause to be valid it must refer to a designated arbitration institution. But the Supreme People’s Court Opinions on the Provision of Judicial Safeguards for the Construction of Pilot Free Trade Zones promulgated in 2016 seems to approve, with preconditions, ad hoc arbitration as it permits companies registered in PFTZs to submit disputes for arbitration at a designated place in mainland China, by designated person(s) and in accordance with designated arbitration rules.

However, it did not set out any clear and practicable legal framework and left the issue of potential conflict between ad hoc arbitration and the mandatory requirement regarding designated arbitration institution unaddressed.

In 2019, some progress was finally made with the promulgation of the Supreme People’s Court Opinions on the Provision of Further Judicial Safeguards for the Construction of One Belt One Road, in which the Supreme People’s Court vowed to explore the practical mode of ad hoc arbitration within PTFZs. From the judiciary’s manifested intention and approving attitude, it is possible that we may see more cases and hopefully new rules about ad hoc arbitration in the future.

Popularization of the Use of Online Arbitration Services

Online arbitration has been in practice but not widely used in mainland China. However, it is predictable that amid the coronavirus outbreak, online arbitration will quickly become a popular alternative for both end-users and arbitration institutions having regard for current international travel bans, intercity traffic restrictions across the country, and the risk of contagion in physical gatherings.

In fact, on Feb. 4, the CIETAC conducted its first online hearing where parties from Shanghai, Shenzhen and Wuhan participated via videoconference with the assistance of the CIETAC Hubei, Shanghai and South Sub-Commissions. It is possible that governmental policies encouraging the use of online arbitration may follow as part of the overall strategy to contain the spread of the coronavirus.

This may further boost the growth of arbitration given that online arbitration provides easier access and has lower costs, higher transparency and greater procedural flexibility as compared to traditional arbitration.

However, as a matter of good practice, it is recommended to treat online arbitration with caution since this mechanism is still developing with technical and legal issues yet to be addressed.

Firstly, it would be problematic for the tribunal to verify the identities of the parties in the proceedings whose only presence in the virtual hearing room may just be a disembodied voice. Even videoconferences are not safer in this regard as they can be easily edited with video face replacement software.

The second issue arises in relation to the verification of the authenticity and legitimacy of evidence as the parties would have to submit evidence and other documents electronically. Surely digital signatures and other technologies such as blockchain would be helpful, but not every end-user of arbitration can use these.

In addition, data security and confidentiality of arbitration would be another big concern. The electronic records or data stream generated during the online arbitration could be easily shared or distributed by one party without the knowledge and consent of the other party, or even hijacked by a third party. Therefore, more technological and institutional innovations are needed to make online arbitration a more practical option.

Conclusion

Despite the coronavirus outbreak, practitioners have confidence that the prospects of arbitration this year in mainland China is promising given the growth of the market volume, the progress of internationalization, and the use of online arbitration, among other factors.



Wilson Wei Huo is a partner at Zhong Lun Law Firm and an arbitrator.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] See, e.g., CIETAC, CIETAC’s Emergence Notice of the Work Arrangement During Novel Coronavirus Defense Period, January 28, 2020, available at http://www.cietac.org.cn/index.php?m=Article&a=show&id=16453.

[2] See, CIETAC, CIETAC Annual Work Report, January 21, 2020, available at http://www.cietac.org/index.php?m=Article&a=show&id=16445.

[3] Same as note 2.

[4] See, BAC, Remain True to Original Aspirations and Moving with Dreams: BAC 2019 Annual Work Report Meeting was Successfully Held, January 20, 2020, available at http://www.bjac.org.cn/news/view?id=3653.

[5] Same as note 2.

[6] Same as note 2.

[7] Same as note 4.

[8] Wilson Wei Huo, Mutual Assistance Gets Closer, China Law & Practice, September 9, 2019, available at https://www.chinalawandpractice.com/2019/09/09/mutual-assistance-gets-closer/.

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