China Justice Observer

中国司法观察

Does China Recognize Ad Hoc Arbitration?

Sun, 06 Oct 2019
Categories: Insights
Contributors: Jian Zhang 张建

Before 2016, China only recognized the legitimacy of foreign ad hoc arbitration, while denying that of Chinese ad hoc arbitration. After 2016, China has permitted the “three-specific-arbitration” within the pilot free trade zone. In the future, China will probably accelerate its exploration pace in ad hoc arbitration.

I. Background

Arbitration can be divided into ad hoc arbitration and institutional arbitration according to the existence of a permanent specialized arbitration institution.

The initial form of arbitration was presented by the ad hoc arbitration. Institutional arbitration was developed only after the emergence of specialized permanent arbitration management organizations, and the arbitration institutions per se do not arbitrate cases. Even in institutional arbitration, the main body responsible for hearing and adjudication is still an arbitral tribunal temporarily formed for a specific case, which will be dissolved right after the case closure.

Alan Redfern and Martin Hunter, distinguished experts in international arbitration law, likened the difference between institutional arbitration and ad hoc arbitration to the difference between “suit bought off-the-peg” and “tailor-made suit”. Given the tailor-made nature of the latter, ad hoc arbitration is more flexible and targeted, thus preferred among businessmen. [1]

II. Question: YES to foreign ad hoc arbitration, but NO to the Chinese counterpart?

Unfortunately, for a long time, China only recognized the legitimacy of institutional arbitration but denied that of ad hoc arbitration. In accordance with Article 16 of the Arbitration Law of the People’s Republic of China (hereinafter referred to as the Arbitration Law), an effective arbitration agreement must contain a selected arbitration commission, while the arbitration agreement fails to do so will be deemed invalid. This inevitably leads to the impossibility of ad hoc arbitration in mainland China.

In contrast, although China’s legislation denies ad hoc arbitration within its own territory, Chinese courts are obliged to recognize and enforce foreign ad hoc arbitration. This is because China acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter referred to as the New York Convention) in 1987. According to Article I (2) of the New York Convention, “The term ‘arbitral awards’ shall include not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which the parties have submitted.”

Thus, in terms of the mutual recognition and enforcement of ad hoc arbitral awards between China and foreign countries, a de facto inequality has emerged, that is, China will recognize foreign ad hoc arbitration, while foreign countries will not recognize Chinese ad hoc arbitration, given China, as the seat of arbitration, has denied itself the legitimacy of its ad hoc arbitration by legislation.

III. Change: the emergence of “three-specific-arbitration”

In order to solve the above problems, on 30 Dec. 2016, the Supreme People’s Court (SPC) promulgated the Opinion on Providing Judicial Support for the Construction of Pilot Free Trade Zone (关于为自由贸易试验区建设提供司法保障的意见) (hereinafter referred to as the 2016 Opinion). According to paragraph 3 of Article 9 of the 2016 Opinion, the arbitration agreement reached by enterprises registered in the Pilot Free Trade Zone as to the arbitration conducted in a specific place in mainland China, in accordance with specific arbitration rules and by specific personnel shall be deemed valid. If a people’s court finds the arbitration agreement to be invalid, it shall report it to the court at a higher level for examination.

This said clause has attracted great attention from arbitration professionals both at home and abroad. Many experts pointed out that this has actually adapted Article 16 of the Arbitration Law and confirmed the legitimacy of conducting ad hoc arbitration in China to a limited extent. More precisely, however, this clause introduces the “three-specific-arbitration”, that is, the seat of arbitration must be a specific place in mainland China, the arbitration rules must be specific rules, and the arbitrators must be specific personnel, which must be clearly agreed upon in the arbitration agreement.

Compared with the internationally accepted ad hoc arbitration, there are more restricted conditions to be satisfied in the “three-specific-arbitration”. Besides, issues such as whether the specific place in mainland China is confined to the Free Trade Zone (FTZ), what arbitration rules are ad hoc arbitration rules, and whether the specific arbitrators are subject to a more rigorous screening mechanism than those in institutional arbitrations are yet to be defined accurately. In order to enhance practicability and provide guidance for the parties to apply the ad hoc arbitration, Zhuhai Arbitration Commission promulgated the Ad Hoc Arbitration Rules for Hengqin Pilot Free Trade Zone (横琴自由贸易试验区临时仲裁规则) in 2017, and China Internet Arbitration Alliance promulgated the Ad Hoc Arbitration and Institutional Arbitration Docking Rules (临时仲裁与机构仲裁对接规则) in September 2017.

IV. Prospect

1. The “three-specific-arbitration” reflects the development needs of China’s Free Trade Zone.

Since the establishment of the first Pilot FTZ in Shanghai in September 2013, as of September 2019, China has established 18 FTZs in five batches in different provinces across the country. These FTZs have basically covered the most developed areas of China’s foreign investment and trade. The introduction of “three-specific-arbitration”  is an important achievement of the innovation of the rule of law and a big sign of ‘dare to pilot’ in FTZs. It is also a realistic need to optimize China’s business environment and to construct a diversified mechanism for international commercial dispute settlement.

2. Exploring the ad hoc arbitration is the demand of developing China’s arbitration.

On 31 Dec. 2018, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued Several Opinions on Improving the Arbitration System and Improving the Credibility of Arbitration (关于完善仲裁制度提高仲裁公信力的若干意见) (hereinafter referred to as the 2018 Opinions), which put forward 23 important measures to improve the arbitration system and enhance the credibility of arbitration in view of the common problems existing in China’s current arbitration practice. According to Article 15 of the 2018 Opinions, the development of China’s arbitration should meet the realistic needs of the coordinated development of Beijing, Tianjin and Hebei, the construction of Xiong’an New Area, the development of the Yangtze River Delta Economic Zone, the construction of the Guangdong-Hong Kong-Macao Greater Bay Area, the National Free Trade Pilot Zone and the Hainan Free Trade Port.

As ad hoc arbitration is an indispensable part of the development of China’s arbitration, the exploration of ad hoc arbitration in mainland China becomes an irreversible important trend.

V. Conclusion

It can be predicted that in the future, ad hoc arbitration with Chinese characteristics will form a legal system that can be replicated and popularized nationwide through gradual experience accumulation, forming an arbitration mode of juxtaposition of institutional arbitration and ad hoc arbitration, so as to provide more options for relevant parties to resolve transnational commercial disputes.

 

[1] Nigel Blackaby et al., Redfern and Hunter on International Arbitration, Oxford University Press, 2009, p.53.

 

Contributors: Jian Zhang 张建

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Does China Recognize Ad Hoc Arbitration?

Before 2016, China only recognized the legitimacy of foreign ad hoc arbitration. After 2016, China has permitted the 'three-specific-arbitration' within the pilot free trade zone.